Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
What to Expect at a Critical Stock Market Point: End of a Wave 2 Rally - 26th Apr 18
A New Lithium War Is About To Begin, Modern Gold Rush! - 26th Apr 18
Silver, silver, and silver! There’s More Than Silver, People! - 26th Apr 18
How to be Financially Prepared When Purchasing Your First Home - 26th Apr 18
Is a Stock Market Crash Imminent or Does this Stock Market Bull Still Have Legs - 25th Apr 18
Gold Price Focusing on May Cycle Bottom - 25th Apr 18
Cash “Vanishes” From Bank Accounts In Ireland - 25th Apr 18
Is the Malaysian Economy a Potemkin Village - 25th Apr 18
Land Rover Discovery Sport Rattling / Knocking Sounds From Car Pillars - 25th Apr 18
China Takes the Long View on Gold-Silver... and So Should You - 25th Apr 18
Russia Buys 300,000 Ounces Of Gold In March – Nears 2,000 Tons In Gold Reserves - 24th Apr 18
Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - 24th Apr 18
CRYPTOCURRENCY MASTERCLASS #CRY90 - 24th Apr 18
UK Gambling Statistics - What the Numbers Say - 24th Apr 18
Chaos Capitalists Short Countries - How Chanos Got China Wrong - 24th Apr
Artificial Intelligence Defines the Political News Narrative - 24th Apr 18
Stock Market "Oops, They Did It Again" - 24th Apr 18
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Crude Oil Supply & Demand Outlook Remains Favorable for Producers

Commodities / Crude Oil May 01, 2012 - 03:33 AM GMT

By: Elliot_H_Gue

Commodities Best Financial Markets Analysis ArticleMy outlook for crude oil prices remains relatively unchanged since the beginning of 2012. Potential demand destruction brought on by persistently high oil prices should limit upside for oil prices.

That being said, don’t assume that US oil demand is collapsing because of elevated oil prices and sluggish economic growth.


Source: Energy Information Administration

This graph tracks the four-week moving average of petroleum product supplies, a measure that includes heating oil, jet fuel, gasoline and diesel. US oil consumption collapsed during the Great Recession and financial crisis of 2007-09 and has never fully recovered. But consumption has held relatively steady; the most recent data indicates that US oil demand is down about 2 percent year over year.

However, the near-term trend is surprising. Despite elevated prices, US oil demand appears to have picked up over the past two weeks--a sign that consumers have grown accustomed to higher prices. These revised expectations are also reflected in March’s stronger-than-expected retail sales data.

Meanwhile, rising oil consumption in China and other emerging markets continues to drive global demand for oil and refined products. The International Energy Agency (IEA) estimates that global oil demand will expand by 800,000 barrels day in 2012--and there could be more upside to this number when you consider that the International Monetary Fund recently raised its outlook for 2012 global economic growth to 3.5 percent from 3.3 percent.

Bottom line: Spikes in the price of Brent crude oil to more than $120 per barrel would probably slow aggregate demand growth, while dips to less than $110 per barrel would encourage consumption.

The supply side of the equation likewise supports elevated prices.

Source: Energy Information Administration

This graph tracks the total number of unplanned outages in global oil production. Shortsighted pundits argued that the restoration of Libyan oil exports would lower oil prices in early 2012.

Libyan supply disruptions (in green) have declined to less than 0.4 million barrels per day as of April this year from roughly 1.4 million barrels per day in October 2011. (Mea culpa: I didn’t expect the nation to restore its oil output in such rapid fashion.)

But supply disruptions elsewhere have almost completely offset these unexpected gains. The Elgin spill has disrupted production in a portion of the North Sea, while a simmering pipeline dispute between Sudan and South Sudan in Africa has also weighed on output. South Sudan achieved independence in July 2011, but the two countries failed to agree upon pipeline transit fees for oil crossing the new border. The resulting dispute prompted South Sudan to shut in about 400,000 barrels per day oil production in January.

The IEA estimates that non-OPEC crude oil production slipped by 500,000 barrels per day in March, and the agency’s revised forecast calls for this output to increase by 700,000 barrels per day on the year. With demand growing faster than non-OPEC supply, the global oil market remains tight; the world will need to rely on additional output from OPEC to fill the gap.

Within OPEC, Saudi Arabia is the sole member that has significant spare capacity. At present, the organization’s total effective spare capacity stands at less than 3 million barrels per day--a drop in the bucket in a global oil market of almost 90 million barrels per day.

Elevated oil prices have little to do with speculation: A tight supply-demand balance ensures that oil prices have ample support.

My updated forecast calls for the price difference between West Texas Intermediate (WTI) and Brent crude oil to narrow in coming months. WTI has historically commanded a premium of $1 to $2 per barrel relative to Brent, but the relationship has reversed in recent years. At the peak difference between the two benchmarks, Brent crude oil traded at levels that exceeded the price of WTI by almost $30 per barrel.

This anomaly stemmed from local logistical constraints that combined to glut the oil hub of Cushing, Okla., the official delivery point for WTI.

On April 18, 2012, Enterprise Products Partners LP (NYSE: EPD) (See my analysis of EPD here) announced that the reversal of its Seaway Pipeline is running ahead of schedule and will be completed by late May instead of late June. The reversed pipeline will transport crude oil from Cushing to the Gulf Coast, where price realizations are much higher. Although the Seaway Pipeline lacks sufficient capacity to eliminate the glut of oil at Cushing, this much-needed escape valve should reduce the spread between WTI and Brent crude oil.  

I continue to expect Brent crude oil to fetch an average of roughly $110 per barrel in 2012, while a barrel of WTI should average more than $100 per barrel. These price ranges should ensure that oil-weighted producers reap sizable profits and encourage drilling activity. Check out Shale Oil and Gas: Energizing the US Economy, for further analysis on US shale oil and gas production.

Mr. Gue is also editor of The Energy Strategist, helping subscribers profit from oil and gas as well as leading-edge technologies like LNG, CNG, natural gas liquids and uranium stocks.

He has worked and lived in Europe for five years, where he completed a Master’s degree in Finance from the University of London, the highest-rated program in that field in the U.K. He also received his Bachelor’s of Science in Economics and Management degree from the University of London, graduating among the top 3 percent of his class. Mr. Gue was the first American student to ever complete a full degree at that business school.

© 2012 Copyright Elliott H. Gue - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Elliott H. Gue Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules