Not so long ago a predicted 2% GDP growth rate for the United States would guarantee liquid energy prices are heading lower. There was a time when an economic slow down of the world's largest energy consuming country would assure lower energy prices are swiftly on the way. The world has changed, and is continuing to change rapidly due to the emerging market energy demand led by China, Brazil, India and Russia.
For 2012 and into the foreseeable future, these emerging market leaders should more accurately be called growth market leaders. China, despite a pull back in double digit growth, likely will lead the pack with 8% growth expected. And although these countries will not be immune to a financial melt down in Europe, with lower debts, much higher reserves, relatively stable banking systems, and trading ever more between themselves, the emerging markets will outpace the "advanced industrialised nations".
Europe's sovereign debt will once again take center stage in the first quarter of 2012. Italy, Spain and France all may receive credit downgrades in January. Italy has massive amounts of debt and is likely to have to pay above 7% on their long dated bonds. The weight of the sovereign debt may cause several European banks to fold, sending the euro and energy prices lower.
Despite this initial set back for energy, demand for crude, motorgas and diesel will likely continue growing in 2012. During 2011, global oil consumption averaged 89m barrels per day, according to the International Energy Agency, the Western world's oil think tank, up from 88.3m in 2010. The global economy was relatively subdued, but oil use still rose to an all-time high. Back in 2001, global oil consumption was just 76.6m barrels daily. So during the decade to 2011, worldwide oil demand rose 16%. We now face another sharp rise, with global usage set to reach 95m barrels daily by 2016. That would amount to a 25% consumption increase in just 16 years.
On the supply side, global crude production expanded to 90m barrels daily in November, up from 89.1m the month before. In addition, OPEC crude output rose to 30.7m barrels per day, a three-year high, with Saudi Arabia and Libya accounting for most of the 620,000 barrel increase.
Last month, in addition, OPEC raised its production ceiling to 30m barrels, the first change in three years, moving the target nearer current output as the exporters' cartel struggles to absorb rising exports from post-war Libya. But, still, despite these favourable supply-side developments, Brent crude has remained stubbornly above $100 per barrel.
One reason oil markets are tight is that inventories are very thin. Oil stocks held by the OECD group of advanced industrialised nations have lately fallen to 2,630m barrels. That's around 57 days of forward cover, several days below the five-year inventory average. In fact, US crude inventories are ending 2011 at their lowest level since late 2008, while European inventories are now at an 11-year low.
This inventory dip reflects two important aspects of global oil production. Several of the world's leading oil fields are losing pressure – not least Ghawar in Saudi Arabia and Mexico's Cantarell. Two of the very biggest fields on earth, both are now producing at levels significantly below their medium-term production forecasts.
At the same time, oil-well exploration and development were hit badly by the credit crunch. Crude production is a seriously capital-intensive business with long "lead times". In recent years, a lack of available finance has hit the oil industry hard.
2012 US gas prices will also need to weather the closing of several Northeastern US refineries and increased exports of US refined products.
The opportunity for energy traders will likely emerge early in the year with a pull back in futures. By the 3rd quarter of 2012 energy futures will have a high probability of breaking out of its year long trading ranges and begin a steady upward trending market.
