Crude Oil Outlook 2012

 
on October 03 2011 3:36 AM

 

XOM, COP, CVX, OXY

In afternoon trading Friday, WTI Crude Oil has fallen below 80 bbl, and end the month off 10%. Given the weak economic news that came out this month, it is any wonder the price did not sink deeper.

What happened to Crude Oil's price was predictable. What happens next is less predictable. The impact on the top line results at integrated Oil companies like Exxon Mobil Corp. (NYSE:XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE:COP) should be moderated somewhat by the strength in their refining results. Exploration & Production companies such as Occidental Petroleum Corp. (NYSE:OXY) may take a hit.

Among the reasons for Crude Oil's falling price are a stronger USD, weaker expected demand in the USA and EU, and, most important, the media and market's noising the herd that China's growth will have a hard landing, though that is likely not the case, as the real numbers will come in a 9%+ in Y 2011.

A rising USD depresses Crude Oil prices, and the USD rose by around 4% in September vs. the Euro and by 6% against a basket of six currencies.

Demand for Crude Oil in the developed countries of North America and Europe are also falling as these economies continue to mark slowed growth.

In the US, Crude Oil stocks at Cushing stand at 341-B bbls, near capacity, but down by 16-M bbls from last year at the same time.

The supply of refined products is down from a year ago too, by -0.7%, and the gasoline supply was down -1.1%.

Domestic prices for gasoline usually follows Crude Oil down, but not quickly because the WTI-Brent Crude price differential keeps the price to Gulf Coast and East Coast refiners high and refiners with access to WTI do not lower their prices, they raise them to the market standard set on the both coasts so the pricing is at the Brent price not the WTI price. So, relief for US motorist's is slight as the higher Brent based Crude Oil pricing formula makes fewer dollars available to buy things other than gasoline.

Internationally, estimated Y 2011 demand for Crude Oil fell by 200,000 BPD in September and the downside risks to the Global economy could lead to an even steeper decline. And as bad as the economies of the developed countries are, media fueled fears that the Chinese economy is cooling off have probably contributed more to the sell-off in Crude, but fact is that China is determined to become energy self reliant and the government subsidizes gas at the pump for it consumers. China's manufacturing sector contracted again in September, for the 3rd consecutive month but it expected to grow in Q-4. The Country is still expected to post GDP growth of 9%+ in Y 2011, and Q-3 growth is expected to come in at 9% or more, but less than the 9.5% growth posted in Q-2. Government fight against inflation includes efforts to keep tight reign on input costs, including energy.

Inflation in China fell last month, and is expected to keep falling slowly through the rest of this year. China's lowered manufacturing output reflects lost sales to the weakening economies of the developed World. With demand for Chinese goods overseas slowed, demand for energy may also fall. How far will have a large impact on Crude Oil prices for the near term. The Key could be the differential between WTI and Brent Crude prices, today the differential is about 23 bbl, way to high IMO

If Brent prices narrow against WTI as WTI prices continue to decline, that augurs Global demand is shrinking, some believe that will be China driven.

When the WTI/Brent differential is 50% what it is today and the WTI price is 10 bbl lower than it is today, some believe that could be when demand from China and other emerging economies will have given up trying to save the World, and IMO that is Bunk. Just more unwarranted China bashing

The fact is the World is awash in Crude Oil, Nat Gas and Coal, as supply rises the price to the consumer should and will fall and the World economies will grow and the recovery will gain momentum. Further, there is a move on in the USA to drill and produce Crude Oil and Nat Gas, the US reserves at huge and at the rate things are going the US could be a net exporter of Crude Oil in 3 to 5 yrs. That said, WTI should come to 40-60 bbl range and fuel at the pump should dive back to the mid to high 2.00 range as the pricing will be local and not Brent Crude bases IMO. Stay tuned...

Paul A. Ebeling, Jnr.

 

Paul A. Ebeling, Jnr

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.

 

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