Geo-political risk
Oil prices ended 2011 close to $100 per barrel mark as
political upheaval in the Arab world outweighed concerns over health of the
global economy. The average price for 2011 increased by 19.6 percent to $94.9
per barrel. World oil demand grew by 1.04 percent in 2011 driven by demand in
the emerging countries, particularly China. Threat of supply disruptions
remained a major theme throughout 2011, particularly with the start of civil
war in Libya which saw WTI prices spike above $110 per barrel mark in Q2, 2011.
The other dominant event has been the ongoing European debt crisis which
threatens to throw a spanner in the global economic recovery. The IMF has
already downgraded its estimate for world economic growth for 2012 in view of
the prevailing risks.
China is expected to be the main driver of oil demand
growth with an expected increase of 0.42 million bpd in 2012. The Chinese
central bank increased the banks reserve requirement ratio six times and the
interest rates three times in 2011 to curb inflation. However, in a surprising
move the central bank cut the reserve requirement ratio in December indicating
that the policy makers have turned their focus back on growth in view of the
expected slowdown in euro zone and other advanced economies. China is likely to
remain the main driver of crude oil demand growth for the foreseeable future
despite the expected decline in GDP growth rate to 8.2 percent in 2012, the
Global report said.
The US economy seems to be trudging along despite the
headwinds from the euro zone crisis and overhang of high debt and deficit. US
unemployment declined to 8.5 percent in December after staying above 9.0
percent for a large part of 2011. The IMF now estimates US economy to grow by
1.8 percent in 2012. Recovery in the US economy, the world's largest oil
consumer, will play a large role in determining the direction of oil prices.
The US Federal Reserve has said that its benchmark interest rates will stay low
at least till late 2014 to spur economic activity and bring down unemployment
further.
Oil prices
Global Research expects average WTI crude oil price to be
in the range of $95-$100 in 2012 which is also consistent with the Bloomberg
Consensus crude oil price of around $98.7 per barrel and close to 2011 average
price of $94.9 per barrel. Global's 2011 estimate for WTI was close to the
actual price. However, its estimate for OPEC crude oil deviated by 26-34
percent as impact of Arab spring was felt heavily in the regional crude oil
prices.
The volatility in 2011 is likely to extend into 2012 as
the European debt crisis remains unresolved, Arab Spring continues and unemployment
remains high in the US. Meanwhile, new sanctions on Iran and subsequent
military drills by the Iranian Navy in the Strait of Hormuz have increased the
risk of stand-off between the US and Iran which could severely disrupt oil
supplies. The transition of power in North Korea has also increased the
geo-political risk with lack of clarity over the direction the isolated country
will take.
OPEC production
Political turmoil in the Middle East had a direct impact
on OPEC oil production as Libya descended into civil war. Production in Libya
fell to 47tbpd in Q3, 2011 compared to an average production of 1.55 million
bpd barrels in 2010. However, the shortfall was filled in quickly with Saudi
Arabia in particular raising its production to 9.6 million bpd in Q3, 2011 from
9.1 million bpd in Q2, 2011. However, the production in Libya is on the road to
recovery as the Transitional National government has taken over.
Saudi Arabia still commands the largest spare capacity of
around 2.71 million bpd despite the increase in production in 2011. This holds
particular significance at a time when Iran is coming under further pressure
because of its nuclear program. European Union plans to halt oil imports from
Iran as part of the sanctions.
World oil demand
World oil demand continued to recover, though at a slower
pace. World oil demand increased by 0.9 million bpd in 2011 after a strong
increase of 1.6 million bpd in 2010. European sovereign debt crisis, Arab
Spring and earthquake in Japan were the major factors which kept a lid on world
oil demand growth. The recovery in 2011 and 2010 came after a steep decline in
2009 by 1.4 million bpd and a slight decline in 2008, the Global report said.
The decline in 2008 was the first fall in oil demand
since 1983 reflecting the impact of the global financial crisis and the ensuing
recession. The global financial system is going through turbulence with debt
crisis in Europe taking the center stage. The impact of the crisis manifested
itself in Western Europe Oil demand which declined by 0.16 million bpd
reflecting the impact of the austerity measures.
World oil demand is expected to increase by 1.21 percent
to 88.9 million bpd. Bulk of the world oil demand growth is expected to come
from China, Latin America and the Middle East region. Increase in China's oil
demand is expected to contribute around 40 percent to the total oil demand
growth in 2012. Fears of hard landing in China have faded with inflation in
China coming down to 4.2 percent in November and a cut in reserve requirement
for banks, indicating a change in focus by policy makers, the Global report
said.
