Crude unlikely to fall in 2012

Though demand is not expected to rise meaningfully, analysts expect oil to average around $120 a barrel.

It’s known that high crude oil prices are constraining global growth. This seems to be particularly true for emerging economies like India. With the developed world expected to hit a speed breaker in 2012, it was widely perceived that oil demand would not rise and this would put pressure on prices. However, analysts seem to believe prices are likely to remain around the pain point ($120 a barrel) through 2012. Citi’s oil analysts are not optimistic about oil demand growth and are modelling demand at 0.8 million barrels per day in 2012 and one million in 2013.

However, stagnant demand is no guarantee for slower oil prices. Also, this year, too, supply disruptions are expected from various producing countries. For instance, the stress between Israel and Iran is expected to escalate and a possible European Union embargo on Iranian oil, sanctions on Syria, elections in Venezuela and Angola and possibilities of succession-related strife in Saudi Arabia are all geopolitical risks.

Macquarie’s global oil economist, Vikas Dwivedi, has sharply raised the assumption for Brent crude prices by 20-50 per cent over FY13-16. He believes the probability of demand growth and constrained supplies more than offset global macro concerns and shale gas production growth in Libya, Iraq and the US.

In addition, last year’s Arab Spring has had an impact on the budgets of producing countries. While the demand-supply dynamics is a big factor, so are the socio-economic compulsions of key producing countries. Saudi Arabia, for instance, has a key role to play in the world oil market and, consequently, the pricing. After the Arab Spring, the country has spent $100 billion on social programmes, which has raised the break-even for the Saudi budget to $90 a barrel (referencing Brent) for 2012, says the International Institute of Finance. Goldman Sachs, too, forecasts Brent to average at $120 in 2012. All those expecting crude prices to fall thanks to a recession in Europe, have another think coming.