Crude Oil Monthly Update - January 2013

Crude oil prices have commenced this year with impressive gains, as bulls sought encouragement from the mitigating concerns regarding US fiscal cliff. US legislators have struck a deal to avoid the fiscal cliff. The deal consists of keeping most of the existing tax cuts intact except on individuals making over US$400,000 or households making US$450,000 per annum. Nothing much is done on the spending cuts, which have been delayed till March, as it seems that the Senate wants to buy some time on this.

Multitude of factors has been aiding the northward journey in the energy complex. Improving US and Chinese macroeconomic scenario, perennial Middle East tensions and start-up of the reversed and expanded Seaway pipeline is providing lot of impetus to the bulls. As the flow of the Seaway oil pipeline has been reversed, it has started draining the glut of crude from the U.S. Midwest to the Gulf coast. Reversal of oil pipeline is also expected to mitigate the problem of supply glut at the Cushing port in US, which is a strategic storage hub for WTI crude oil. Rebound in Chinese manufacturing activity has also provided a shot in the arm for the bulls. Recent flow of macroeconomic numbers in China suggests that the country’s manufacturing sector continues to expand. Meanwhile, Chinese demand for oil also remains steady, with the country’s 2012 oil imports rising 6.8% from 2011.

On geopolitical front, the political situation in Egypt, Syria and Yemen continues to deteriorate, which in fact has maintained the “geopolitical risk premium” in Brent oil prices. This can be justified by the fact the Brent crude oil prices have been constantly trading at a premium of US$16-20/bbl over WTI oil during the entire 12 months of 2012. In addition, there always lies a possibility of Israel striking a war against Iran. The odds for this probability may not be high; however it could be a game changer for the oil markets. The rift between the West and Iran continues, with the negotiations between U.N. nuclear watchdog and Iran failing to finalize a deal yet that would allow further investigation into the country’s atomic program. Meanwhile, fears of an attack on oil assets in Libya have escalated off late and the oil producing nation has beefed up security at its key oil facility.

On fundamental front, world oil demand during 2012 has grown by 1% on a yoy basis, while global supply grew at 2.4%. The global market balance during the twelve months of 2012 stood at a surplus of 0.8mbpd, while the same period during the previous year witnessed a deficit of 0.3mbpd.

At this juncture, WTI oil prices are successfully sustaining above the crucial support level of US$94/bbl. Oil prices have recently tested the high of US$97.8/bbl, and strong buying is witnessed at the current levels. This has augmented the probability of prices extending the upside till US$100-101/bbl. Geopolitical dynamics, improving economic scenario in US and China should also provide lot of support to the energy complex.