The recent slightly lower revision of the global crude price projections by various global forecasters is predominantly backed by the indication of slowing demand growth, while some improvements in the supply prospects.
More precisely, when looking at the first half of the new year, the demand expectations are subdued by the two anomalies in the global economy: The aftereffects of the US fiscal cliff on consumption, and the dispute between China and Japan over the islands of South China Sea, which will not let growth to accelerate before the latter half of 2013.
While the demand for oil is expected to be tight in the major oil consuming countries like Japan and United States, consumption in 2013 is most likely to pour in from big economies like China, India and Middle East.
On the supply side, growth will kick in primarily from Iraqi oil. Nordea, a financial group in Northern Europe, has its eyes set on Iraq which has been growing faster than expected after the licensing rounds a couple of years ago.
The return of Libya together with Saudi Arabia’s offshore project, Manifa, coming on stream will bring in the relaxation required in the global supply to build the capacity buffer in the global oil market for 2013 and 2014.
However, the supply side risks cannot be warded off. Despite the weakening of global demand, the oil prices are expected to remain mulishly high. This is because the new production coming online is basically the more expensive, unconventional one due to the natural decline in conventional reserves all around the world.
Also the oil sector worldwide has high cost inflation. From the costly deepwater rigs to the adequate know-how and the right personnel, cost pressures are stronger than the weak demand to drive up the prices or at least keep them buoyant above the psychological $100 mark.
Indeed all forecasts, especially for oil, are fraught with qualms. Events like Syrian contagion in Iraq in the forthcoming year, though less likely, has a tendency to thrust oil prices upwards. Meanwhile, if China’s soft landing is unfortunately avoided for a hard hit, the prices along with the economic growth in the region will plunge to new lows.