Year 2012 was not only action- packed for the commodities market but was also a remarkable one for crude oil, as it metamorphosised from being in deficit in the last 30 years to surplus.
Although the year started on a positive note on the back of geopolitical tensions, prices remained under pressure during most of the year, on strong growth in US crude oil production, primarily driven by a combination of horizontal drilling and hydraulic fracturing, which has unlocked supplies trapped in shale formations in the states of North Dakota, Texas and Oklahoma.
A marginal upside in Q3, after central bankers announced a spree of stimulus measures, was short-lived and Nymex crude oil ended 2012 with seven per cent losses. A bleak demand outlook for the last quarter by the Energy Information Administration (EIA) and doubts over the US fiscal cliff saw Nymex crude prices declining 0.5 per cent in the last quarter of 2012. However, in the Indian markets, MCX crude oil prices gained 2.4 per cent in the quarter, backed by weakness in the Indian rupee.
The New Year has brought mixed sentiment. The same drivers of upward revisions to the 2012 forecast are driving expectations of strong production growth through 2013, which is expected to weigh on prices in the coming quarters.
However, supply concerns from Iran, along with a cut in output by Saudi Arabia, the largest crude oil producer in Opec, could to some extent offset the higher US output, thereby restricting a sharp fall in prices. Although, Opec cut its output by 465,000 barrels a day in December to 30.4 million barrels per day (mbpd), the lowest level since October 2011, it expects further reduction of 800,000 barrels a day to arrive at an average of 29.6 mbpd in 2013.
While demand-supply fundamentals will have long-term implications, crude oil prices in the short term might take cues from the macroeconomic conditions, geopolitical issues and near-term seasonal factors. The reduction in growth forecast by the World Bank for developed nations at 2.4 per cent, coupled with ongoing concerns over the debt ceiling could keep sentiments weak in the short term. Resumed services of the Seaway pipeline, which runs from Cushing in Oklahoma to the Gulf Coast, in the second week of January and its increased capacity of 400,000 barrels a day from the previous 150,000 barrels a day, could increase supplies in the central US. However, EIA forecasts Q1 2013 world demand at 89.55 mbpd, up from 88.69 mbpd during Q1 2012.
Also, the International Energy Agency has forecast global demand to rise by 865,000 barrels a day to 90.5 mbpd in 2013. Thus, a roller-coaster ride is justified at the present juncture, with Nymex crude oil prices expected to trade between $88 and $100 a barrel and on the MCX between Rs 4,800 and Rs 5,400 a barrel in the January-March quarter, from Rs 5,120 per barrel on the MCX now. Brent crude oil prices are expected to trade in the range of $105-120 a barrel (CMP: $110 a barrel).
The ability of European leaders and US policymakers in this testing time could create a big impact on crude oil consumption. Any positive development in this regard in the coming quarter could act as a risk to the downside for these prices.
The author is associate director — commodities and currencies, Angel Broking
There is a small window till March-end. After that, liquidity will ease and banks might not be so benevolent