Crude oil remained positive and rose almost 10% in the first half of 2012 following positive cues from the global financial markets. The oil market was also well supported as exports from Iran contracted sharply due to tighter sanctions on the nation by the US and Europe to control the nuclear activity going on in the country.
However, in the early second half of 2012, oil prices contracted by approximately 20% following higher production numbers from the Organization of the Petroleum Exporting Countries or OPEC (mainly from Libya and Saudi) and non-OPEC nations (such as US, Canada and Russia).
Higher output from all major producing nations and continuous lower demand of oil from both emerging and non-emerging nations further kept oil prices under pressure.
Oil demand is expected to improve slightly in 2013 following lower growth in 2012 on account of muted economic recovery. Demand is expected to grow by 1 mpbd or 0.9% approximately on a year-on-year (y-o-y) basis in 2013 compared to a fall of 0.4% last year. Demand is expected to grow mainly from the emerging markets (non-OECD nations).
We expect demand from developing countries to overtake demand in developed economies. OECD nations are not expected to show any major improvement in oil demand due to structurally weak growth in their nations. Emerging markets are still expected to perform better and oil demand to remain strong, with the use of loose policy to offset weakness in major export markets.
However, on the supply side, the market is expected to remain well-balanced throughout 2013, keeping the supply-demand dynamics stable. Global supply is expected to increase by 1 mbpd approximately with the help of increased production from the Organization of the Petroleum Exporting Countries (OPEC) and Non-OPEC members. Last year, OPEC produced around 31.34 mbpd, which is higher by 1.34 mbpd than the production quota of 30 mbpd that was agreed in the latest meeting. Crude oil supply from non-OPEC countries is expected to increase by 2.5% in 2013. The US and Canada would be the major drivers as output grows with extraordinary production from shale oil in the US and increasing production from oil sands in Canada.
Oil demand in Organization for Economic Cooperation and Development (OECD) nations is expected to remain weak in 2013. Major oil consumers such as the US and Europe are constantly showing a fall in demand figures. US, the top consumer of crude oil, has witnessed a fall of 2.09% in 2012 as compared to the previous year and a further fall of 0.5% is expected in 2013. The weak demand figure in the US is justified by a slow growth in the economy.
European oil demand declined by 2.6% on a y-o-y basis and in 2013 the demand is expected to fall by 2.09% due to the ongoing debt crisis in the country. The total OECD demand is expected to remain weak in 2013 followed by weak demand from major oil-consuming nations and may fall by 0.5% as compared to a fall of 1% in 2012 on a y-o-y basis.
Outlook
Combined efforts from all the major central bankers such as US, China, Japan and ECB have resulted in stable economic conditions. Demand from Non-OECD nations is expected to pick-up further in the first half of 2013 especially from China followed by Japan and India. We expect oil prices to remain stable in the coming quarter. Our view remains from neutral to bullish for the first half of 2013, supported by improving oil demand and slight recovery in the global economy. We expect oil prices to remain in the range of USD 93 - USD 97/barrel in the near term.
Source: Nirmal Bang