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Outlook for Oil Prices

pic of JPT Editor John DonnellyThose who make a living predicting oil prices see a softer ­market in 2013, although prices are forecast to stay at historically high levels.

Many analysts are predicting that oil prices will fall this year because of global economic weakness and the tremendous production growth coming from North America. The Organization for Economic Cooperation and Development lowered its outlook for global growth this year from 4.2% to 3.4%, saying that the European debt crisis would seriously threaten the world economy. A survey by Reuters of 29 analysts, for instance, forecasts that Brent crude oil will average USD 107/bbl this year and WTI will average just under USD 95/bbl. That is about USD 5/bbl below their average price in 2012. But there is wide divergence among the analysts, with five analysts predicting that Brent will average less than USD 100/bbl and one forecast as low as USD 80/bbl. Those analysts see a fundamental oversupply of oil this year that will drag down oil prices. The highest forecast in the group was for USD 125/bbl Brent.

Other price forecast surveys show similar predictions of weakness in the oil market, not only in 2013 but in 2014 as well. The Goldman Sachs Group believes that suspended oil production from Iran, Sudan, Syria, and Yemen will be restored over the next 3 years, contributing to an oversupply of oil.

OPEC is already reacting to the somewhat bearish price outlook. Saudi ­Arabia, the world’s largest producer, cut production in December by 465,000 BOPD to 9.025 million BOPD, its largest monthly drop since November 2008. OPEC recently decided to reduce oil supplies because of the rising North American output and recovering oil shipments from Iraq. Brent prices may drop as much as 20% in the first half of this year if OPEC does not significantly curtail production, according to the Centre for Global Energy Studies. OPEC Governor Ali Yabhouni of the United Arab Emirates (UAE) agreed last month that the “call” on OPEC crude this year would be flat to declining. Speaking at the Gulf Intelligence UAE Energy Forum in Abu Dhabi, he forecast that global oil demand would increase by 800,000 BOPD this year compared with 2012, but noted that non-OPEC production would increase 900,000 BOPD. The US Energy Information Administration expects global consumption to rise by nearly 1 million BOPD this year while non-OPEC production increases by 1.3 million BOPD, with most of the increase coming from US tight oil and Canadian tar sands.

While the price outlook might be bearish, exploration and production (E&P) spending continues to be robust. Oil activity outside of North America will contribute to a 7% increase in worldwide energy E&P spending to a record high USD 644 billion, according to Barclays’ 2013 Global E&P Spending Outlook. The regions seeing the most E&P activity are expected to be Latin America, Australasia, and the Middle East. The operators participating in the survey are basing their 2013 plans on oil prices of USD 98/bbl Brent and USD 85/bbl WTI, which suggests that the projections may ­actually underestimate E&P spending levels.