Oil prices had a low point or two in 2011, but finished the year with a fairly decent run, ending on the $100 mark despite fears of a potentially serious recession in Europe. In the ordinary course of events you would expect fears of a slowdown in global trade to cause the price of oil to slide, but the price of oil is determined by fears of bottlenecks in supply just as much, or probably quite a bit more, than by fears of a falling off in demand.
As 2011 drew to a close the Strait of Hormuz, through which some one fifth of the world’s oil moves, had become a major factor in analysts’ calculations about future supply availability. Back in November the geopolitical analysis house Stratfor had warned in one of its periodic security briefings, that Iran has the ability to control or shut down shipping through the Strait of Hormuz more or less at will. A few successful medium and long range missile tests as part of an Iranian navel exercise in the area in late December gave point to this threat. The Strait, as Stratfor points out, is the global economy’s Achilles heel and would be a limiting factor on any US moves to counter either Iran’s nuclear ambitions or its desire to extend its influence in Iraq and across the Middle East generally.
If Iran is pushed hard by the US or the world community over its uranium enrichment program, we can expect it to retaliate by threatening to choke off the world’s oil supply, Stratfor has maintained in several briefings through 2011.
The proof of this was not long in coming. In the closing days of 2011, a senior Iranian official, the first vice president, Mohammad-Reza Rahimi, made the threat explicit, according to a story on 27 December, in the New York Times. The reason was the Obama Administration’s move to sign into law new legislation that will impose a raft of additional economic sanctions on Iran’s already stressed economy. Oil income provides around 50% of Iran’s annual revenues and the new measures are specifically targeting oil exports from Iran. As the NYT points out, this “carries the risk of confrontation, as well as economic disruption, given the unpredictability of the Iranian response.”
Rahimi had warned that if Iranian oil exports are harmed, “then not one drop of oil will flow through the Strait of Hormuz”. For its part the US Administration says that it has contingency plans in place if the Strait is closed. However, it has not elaborated on those plans or said whether they include a military option. None of this bodes well for the global economy in early 2012.
According to the NYT, the proposed sanctions will block any company doing business with the Iranian Central Bank from conducting any future financial transactions with the US. Since the Central Bank collects payment for most of the country’s oil exports, oil purchases have to go through the Iranian Central Bank. So the sanctions will force many of those buying oil from Iran to look elsewhere for their supplies. The move will not please a number of the US’s allies, despite some latitude being written into the legislation and it gives Obama some wiggle room to back off if the sanctions cause the price of oil to skyrocket.
Analysts are generally taking this point on board. Robin Geffen, chief executive of Neptune Investment Management believes continued tension and geopolitical uncertainty in the Middle East will underpin a high oil price during 2012, as will “US economic data continuing to impress relative to rather depressed assumptions.”
Geffen, who runs the Neptune Russia and Great Russia fund, believes that “continued firm oil prices will maintain a positive backdrop for the Russian economy.”
However there is also a remarkably wide spread of views among professional oil analysts concerning the oil price in 2012.
In forecasts compiled by Canada’s Financial Post, other investment banks were in line with Goldman Sachs – Barclays predicted that Brent would average $115, and WTI $105) in 2012. Other predictions included: Merrill Lynch (Brent: $108, WTI: $101), Deutsche Bank (Brent: $115, WTI: $105) and Standard Chartered (Brent: $107.5, WTI: $100.25).
However a Bloomberg survey of 27 oil analysts predicted that WTI will average $100 per barrel in 2012. That is 25 cents up on the record high of $99.75 set in 2008. The US benchmark oil price averaged $95 per barrel in 2011.
According to Financial Post, most analysts expect WTI-Brent spreads to narrow in 2012, as Enbridge reverses the Seaway pipeline to allow flows from the Cushing, Oklahoma, storage hub to the Gulf of Mexico coast.
Signals remain very mixed. On the one hand there are signs of a better than expected uplift to the manufacturing sectors in the US and the UK, and some positive indicators from China and India, all of which suggests that demand for oil could be boosted by better than expected growth in 2012. That helps to keep the price of oil up as does the Iranian threat, which goes to supply issues. But several analysts, including Blackstone’s renown economic forecaster Byron Wien take a more bearish view. Wien is chairman of the advisory services unit at Blackstone, the world's largest asset management group. In his annual “10 Surprises” list, published annually since 1986 (and with a great track record on the accuracy of the predictions), Wein forecasts an average price of $85 for oil through 2012. The reason for the depressed price, he says, is the impact that the upsurge in US shale gas is going to have on oil imports to the US, which he expects to fall sharply, thus reducing demand in 2012 despite any growth in the US economy. The consensus anticipated range across all analysts? Somewhere between $85 and $120, with as much upside risk as you care to mention...
Further reading on the oil industry
- Sector Profile: The oil and gas industry
- The Oil Crunch – is London the only place that cares? By Anthony Harrington
- 'Big Oil' driven into blind alley by myopic investors and 'resource nationalism' by Ian Fraser
Tags: Iran , Iraq , Middle East , oil , oil and gas , oil price , oil prices , oil reserves , Strait of Hormuz , US , US shale gas , USA