Global Research Sector-Oil 03 February 2013

Oil Market Outlook 2013

WTI crude oil prices expected to be around USD85-90 per barrel in 2013 US crude oil production to drive Non-OPEC supply growth in 2013 China to remain the main oil demand growth driver in 2013 2012 WTI crude oil prices decline by 1.0%YoY to USD94.1 per barrel

WTI crude oil prices expected to be around USD85-90 per barrel in 2013

Oil Report

Global Research expects average WTI crude oil price to be in the range of USD85-90 per barrel in 2013 which is slightly conservative compared to Bloomberg Consensus crude oil price of around USD97.0 per barrel and slightly lower than 2012 average price of USD94.1 per barrel. Our assumption is backed by expected strong growth in Non-OPEC supply which is likely to keep a lid on oil prices despite improvement in economic outlook in US and China. In addition, key players have expressed their satisfaction with current crude oil prices. Thus, with the expected increase in OPEC spare capacity in 2013, we believe, OPEC will have the leverage to keep oil prices near current levels in case they threaten to go up to unsustainable levels.

Significant risks remain mainly to the downside

Prolonged downturn in Euro-zone poses a major downside risk to oil prices along with any excessive fiscal consolidation in the US. Slow down of economic growth in China and more than expected increase in US oil production also poses a significant downside risk. On the other hand, continued political instability in the Middle East, particularly in Egypt and Iran and better than expected world economic growth provide upside risk to oil prices. Oil Price Movement
1600 120 110 1.40 120

110
1.35 100

1500
100 1400 90 80 1300 70
Nov-12

1.30

90
80

1.25 70
Nov-12
Jun-12 Jan-13

Jun-12

May-12

Feb-12

Mar-12

Aug-12

Sep-12

Dec-12

Jan-13

Apr-12

Jul-12

1200

60

Oct-12

May-12

Feb-12

Mar-12

Apr-12

Jul-12

1.20

60

Aug-12

Sep-12

Oct-12

S&P500

WTI

USD/EUR

WTI

Source: OPEC, EIA, Bloomberg & Global Research

2012 average WTI prices end at the lower end of our estimate
Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel: (965) 2295-1270 Umar Faruqui, CFA, ACCA Financial Analyst ufaruqui@global.com.kw Tel: (965) 2295-1438 Global Investment House www.globalinv.net Average WTI oil prices ended 2012 at the lower end of our estimated range of USD95-100 per barrel given in our Oil Market Outlook 2012 report. Average 2012 WTI price of USD94.01 was down slightly by 1.0% compared to 2011. Meanwhile, world oil demand grew by 0.86%YoY in 2012 after increasing by 1.04%YoY in 2011. The demand was driven by emerging countries, particularly China. European debt crisis remained a major theme throughout 2012 as policy makers in Europe made frantic efforts to save the currency union. In short, concerns over economic growth in US, Europe and China were counterbalanced by oil demand growth and geo-political risk, particularly in the Middle East.

North America expected to account for two-third of growth in Non-OPEC supply

According to EIA, North America is expected to account for two-third of the projected growth in NonOPEC supply over the next two years due to continued production growth from US tight oil formations and Canadian oil sands. The prediction that US will become the largest oil producer by 2017 has become a topical discussion, particularly in the energy exporting countries.

Dec-12

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Oil Report

Oil Market Outlook-2013

Euro-zone in a better situation; Major risks remain
Europe stands in a much better position compared to last year. Even though, IMF in its January 2013 WEO report, has revised downwards its 2013 GDP estimate for Euro Area to a contraction of 0.2% from an expected expansion of 0.2% given in its October 2012 WEO report, the risks of the break-up of the currency union have significantly reduced. The major developments included pledge by ECB to purchase bonds of struggling countries if they seek help from Europes rescue fund. This move has brought the borrowing costs down by providing a sort of protection against wild moves in the market. The other major development was related to approval by Euro-zone lenders to give USD56.0bn to Greece to deal with the debt crisis. The move highlights the determination of the Euro-zone to keep Greece within in the bloc. Meanwhile, rise in consumer confidence to a 2.5 year high in Germany has mitigated fears about the crisis dragging down the Europes largest economy. In addition, consumer and investor confidence for the whole Euro-zone increased in January 2013. However, major downside risks remain as the Euro-zone countries will need to sustain the austerity measures which threaten to prolong economic recession and cause social unrest.

China to remain the main growth driver

China is expected to be the main driver of oil demand growth with an expected increase of 0.35mnbpd in 2013. Fears of a hard landing were dispelled by a rebound in 4Q12 GDP. According to IMF, the Chinese GDP is expected to increase by 8.2% in 2013 compared to 7.8% in 2012. The target inflation rate for China is 3.5% for 2013. Inflation inched up to 2.4%YoY in December 2012, indicating a room for following a more flexible monetary policy to support growth. High economic growth in China is expected to be sustained by domestic consumption as export growth slows down. The statement released after the annual leadership meeting in China also highlighted the importance of domestic demand to sustain Chinese economic growth.

US economy on the road to recovery; Bernanke hints at continuation of QE3

With fiscal cliff out of the way, the issue of increasing the debt ceiling and fiscal consolidation has come to the fore. Any agreement on tax increases or spending cuts will be watched closely as any excessive fiscal consolidation can derail recovery. However, recovery in house prices, improvement in retail sales, increase in ISM index and reduction of unemployment rate has breathed optimism in the markets. IMF expects US economy to grow by 2.0% in 2013 after increasing by 2.3% in 2012. Recovery in the US economy, the worlds largest oil consumer, will play a large role in determining the direction of oil prices. Ben Bernanke in his recent statement has indicated that it is unlikely to ease its USD85bn monthly bond purchases to help the recovery process and bring the unemployment rate down further.
Real GDP Grow th % World United States Euro Area China MENA Source: IMF 2009 -0.6 -2.6 -4.1 9.1 2.0 2010 5.2 3.0 1.9 10.4 4.3 2011 3.9 1.8 1.4 9.3 3.5 2012e 3.2 2.3 -0.4 7.8 5.2 2013e 3.5 2.0 -0.2 8.2 3.4 2014e 4.1 3.0 1.0 8.5 3.8 Oil dem and (m nbpd) World North America Western Europe China Middle East Source: OPEC 2009 84.3 23.3 14.7 8.2 7.1 2010 86.9 23.8 14.6 9.0 7.3 2011 87.8 23.6 14.4 9.4 7.5 2012e 88.8 23.8 13.8 9.7 7.6 2013e 89.6 23.9 13.6 10.1 7.8

WTI crude oil prices expected to be around USD85-90 per barrel in 2013
Global Research expects average WTI crude oil price to be in the range of USD85-90 per barrel in 2013 which is slightly conservative compared to Bloomberg Consensus crude oil price of around USD97.0 per barrel and slightly lower than 2012 average price of USD94.1 per barrel. Our assumption is backed by expected strong growth in Non-OPEC supply which is likely to keep a lid on oil prices despite improved economic outlook in US and China. In addition, key players have expressed satisfaction with crude prices at current levels. Thus with the expected increase in OPEC spare capacity in 2013, we believe it will give OPEC members the leverage to keep prices near current levels in case they threaten to go up to unsustainable levels.
USD per barrel Global Research estimate for OPEC crude oil Average OPEC price Global Research estimate for WTI crude oil Average WTI price Source: OPEC & Global Research 2009 55-60 61.06 60-65 61.88 2010 75-80 77.45 80-85 79.42 2011 80-85 107.5 85-90 94.9 2012 90-95 109.45 95-100 94.09 2013e 97-103 85-90 -

2012 forecast end close to our forecast

Our 2012 estimate given in Oil Market Outlook 2012 for WTI was close to the actual price. However, our estimate for OPEC crude oil deviated by 15-21% as the gap between WTI and OPEC crude prices failed to narrow down. We now expect the premium for OPEC basket price over WTI to persist as geo-political risk remains high in the Middle East and crude oil production increases in the US. Historically, WTI has traded at a USD2.0 per barrel premium over OPEC basket price.

February 2013

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Oil Report

Oil Prices at a Glance

130 120 110 100 90 80 70

May-12

Aug-12

Nov-12
Year 2011 107.46 107.82 106.17 114.15 111.9 111.57 106.11 105.63 106.53 97.94 109.77 101.03 112.92 111.36 106.21 105.64 107.54 114.79 109.19 94.99 -16.38 5.15

Jan-12

Jun-12

Jul-12

Feb-12

Mar-12

Jul-12

Oct-12

Apr-12

WTI Source: Bloomberg & Global Research

OPEC

Selected Crude Oil Types

Change USD per barrel OPEC Reference Basket Arab Light Basrah Light Bonny Light Es Sider Girassol Iran Heavy Kuwait Export Marine Merey Murban Oriente Saharan Blend Brent Dubai Isthmus Mars Minas Urals WTI WTI/Brent Brent/Dubai
Source: OPEC Monthly Oil Report

Nov 12 106.86 108.47 105.45 110.91 109.01 108.91 106.8 106.82 107.12 93.28 109.69 97.15 109.36 109.11 107.22 99.37 102.95 108.26 108.23 86.59 -22.52 1.89

Dec 12 106.55 108.35 105.04 111.19 109.29 108.92 106.56 106.19 106.25 91.68 108.9 98.68 109.89 109.29 106.34 99.03 103.96 108.96 108.21 88.23 -21.06 2.95

Dec/Nov -0.31 -0.12 -0.41 0.28 0.28 0.01 -0.24 -0.63 -0.87 -1.6 -0.79 1.53 0.53 0.18 -0.88 -0.34 1.01 0.70 -0.02 1.64 1.46 1.06

Sep-12

Dec-12
2012 109.45 110.22 107.95 113.68 111.87 112.21 109.05 108.93 109.25 100.03 111.75 102.76 111.51 111.63 109.06 106.53 106.79 116.56 110.49 94.09 -17.55 2.58

February 2013

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Oil Report

OPEC Production and Spare Capacity

OPEC production declines as Saudi Arabia reduces production
OPEC production declined for the second successive quarter largely due to the decline in Saudi oil production by 347,000bpd in 4Q12. Saudi Arabia is scaling back production after it increased its production to around 9.8mnbpd barrels in 3Q12 compared to around 9.1mnbpd in 2Q11 to offset a decline in Iranian and Libyan oil production. The decline is consistent with our expectation as Libyan production has reached close to pre-revolution levels and OPEC moves towards adhering to output ceiling of 30.0mnbpd.
OPEC Production ex-Iraq (mnbpd) and OPEC Quarterly Oil Prices (USD)
120.0 30

Start of unrest in Libya

OPEC Production Cut of 2.2mn barrels

100.0 28 80.0

Start of unrest in Libya

Imposition of EU sanctions on Iran

60.0 26 40.0

20.0

24

2Q-09

3Q-09

2Q-10

3Q-10

2Q-11

3Q-11

2Q-12

3Q-12

4Q-08

1Q-09

4Q-09

1Q-10

4Q-10

1Q-11

4Q-11

1Q-12

OPEC Production (RHS) Source: Bloomberg,OPEC & Global Research

OPEC Price (LHS)

Spare capacity expected to increase

OPEC spare capacity in 2012 reduced to its lowest level since 2008 as OPEC members increased production to offset decrease in production from Iran and Libya. Spare capacity estimates can differ depending on the source. However, as per the data available, Saudi Arabia accounted for almost all of the spare capacity. The definition of spare capacity as per EIA is the volume of production that can be brought into production within 30 days and sustained for 90 days. Going forward, the spare capacity is expected to breach 3.0mnbpd in 2013 as OPEC members reduce their production to adhere to the production quotas and oil supply from Non-OPEC countries increases, particularly oil production in US.
OPEC Spare Capacity (mnbpd)
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 140 120 100 80 60 40 20 0

Source: EIA & Global Research

February 2013

1Q 2001 2Q 2001 3Q 2001 4Q 2001 1Q 2002 2Q 2002 3Q 2002 4Q 2002 1Q 2003 2Q 2003 3Q 2003 4Q 2003 1Q 2004 2Q 2004 3Q 2004 4Q 2004 1Q 2005 2Q 2005 3Q 2005 4Q 2005 1Q 2006 2Q 2006 3Q 2006 4Q 2006 1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014 4Q 2014
OPEC Spare Capacity WTI Real Price (GDP Deflated)

4Q-12

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Oil Report

Non-OPEC Supply
Non-OPEC supply increase by 0.54mnbpd in 2012
Non-OPEC supply grew strongly by 0.54mnbpd in 2012 after a sluggish growth of 0.13mnbpd in 2011. The growth was driven by increase in oil production in the North American region by 1.07mnbpd. According to EIA, North America is expected to account for two-third of the projected growth in Non-OPEC supply over the next two years due to continued production growth from US tight oil formations and Canadian oil sands. The prediction that US will become the largest oil producer by 2017 has become a topical discussion, particularly in the energy exporting countries.
Non-OPEC Oil Supply growth (mnbpd)
1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
North America Western Europe Latin America FSU China Total Non-Opec

-0.2 -0.4 -0.6

2007

2008

2009

2010

2011

2012e

2013e

Source: OPEC & Global Research

North America to drive Non-Opec supply growth in 2013

Non-OPEC supply is expected to increase by 0.93mnbpd in 2013. North America is expected to remain a significant contributor to supply growth with an estimated increase of 0.61mnbpd due to extraction of tight oil. Meanwhile, Europe is expected to continue its decline in production by 0.16mnbpd in 2013 due to ageing oil wells in the North Sea.
(Oil supply m nbpd) Americas Europe 2012 1Q13 2Q13 3Q13 4Q13 2013 Change 13/12

16.62 3.77 0.62 21.01 3.59 4.72 1.51 2.33 12.15 13.31 0.14 4.20 17.65 50.81 2.17 52.98 52.93 0.05

17.10 3.73 0.67 21.49 3.59 4.76 1.47 2.32 12.13 13.40 0.14 4.27 17.81 51.43 2.21 53.64 53.48 0.16

17.17 3.57 0.69 21.43 3.61 4.78 1.46 2.40 12.24 13.35 0.14 4.24 17.73 51.40 2.21 53.61 53.48 0.14

17.24 3.50 0.69 21.44 3.62 4.89 1.50 2.47 12.49 13.39 0.14 4.24 17.77 51.70 2.21 53.91 53.81 0.10

17.40 3.66 0.68 21.73 3.64 4.95 1.55 2.49 12.64 13.51 0.14 4.26 17.91 52.28 2.21 54.49 54.54 -0.05

17.23 3.62 0.68 21.53 3.62 4.84 1.50 2.42 12.37 13.41 0.14 4.26 17.81 51.71 2.21 53.92 53.83 0.09

0.61 -0.16 0.07 0.52 0.02 0.13 -0.02 0.09 0.22 0.10 0.00 0.05 0.15 0.89 0.04 0.93 0.90 0.03

Asia Pacific
Total OECD Other Asia Latin America Middle East Africa Total DCs FSU Other Europe

China
Total "Other regions"

Total Non-OPEC production Processing gains

Total Non-OPEC supply Previous estimate Revision Source: OPEC Monthly Oil Report

February 2013

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Oil Report

World Oil Demand

Reduction in European oil demand pull down world oil demand growth
World oil demand continued to recover, though at a slower pace. World oil demand increased by 0.76mnbpd in 2012 after an increase of 0.9mnbd in 2011. European sovereign debt crisis and slow pace of recovery in the US kept a lid on world oil demand growth. Crude oil demand declined by 0.24mnbbpd in North America. In the US, crude oil consumption was affected by weak industrial production, high fuel prices and fuel switching towards natural gas. Meanwhile, Europe also witnessed a significant decline of 0.51mnbpd in 2012 as austerity measures undertaken by the countries to deal with the debt crisis has taken its toll on crude oil demand. On the other hand, China was the main oil demand growth driver accounting for 40.0% of oil demand growth.
World Oil Dem and growth (m nbpd)
2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 2007 2008 2009 2010 2011 2012e 2013e No rth America Western Euro p e To tal OECD Mid d le East Ch in a To tal DC's Wo rld

Source: OPEC & Glob al Research

China expected to account for 46.0% of oil demand growth in 2013

World oil demand is expected to increase by 0.77mnbpd in 2013 which is similar to the growth in 2012. Bulk of the world oil demand growth is expected to come from China, Latin America and the Middle East region. Increase in Chinas oil demand is expected to contribute around 46.0% to the total oil demand growth in 2013. Chinese economic growth rebounded 7.9%YoY in 4Q12 from 7.4%YoY in 3Q12 driving away fears of a hard landing. Chinese economy is expected to grow by 8.2% in 2013.
Oil dem and (m nbpd) Americas Europe Asia Pacific Total OECD Other Asia Latin America Middle East Africa Total FSU Other Europe China Total "Other regions" Total world Previous estimate Revision 2012 1Q13 2Q13 3Q13 4Q13 2013 Volum e %

23.82 13.80 8.48 46.11 10.75 6.26 7.56 3.37 27.94 4.39 0.65 9.71 14.75 88.80 88.80 0.00

23.65 13.56 9.05 46.26 10.69 6.14 7.66 3.37 27.86 4.33 0.64 9.77 14.74 88.86 88.90 -0.05

23.72 13.51 7.88 45.10 10.96 6.37 7.62 3.40 28.34 4.17 0.60 10.25 15.01 88.46 88.45 0.00

24.02 13.56 8.25 45.84 11.06 6.63 8.09 3.28 29.07 4.59 0.64 9.91 15.13 90.04 90.05 -0.01

24.08 13.63 8.69 46.40 11.00 6.50 7.64 3.43 28.58 4.82 0.73 10.31 15.86 90.84 90.83 0.01

23.87 13.56 8.47 45.90 10.93 6.41 7.75 3.37 28.46 4.48 0.65 10.06 15.19 89.55 89.57 -0.01

0.04 -0.24 -0.02 -0.21 0.18 0.15 0.19 0.00 0.53 0.09 0.00 0.35 0.44 0.76 0.77 -0.01

0.18 -1.72 -0.22 -0.46 1.67 2.47 2.55 0.06 1.89 1.96 0.73 3.59 2.98 0.85 0.87 -0.01

Dcs

Source: OPEC Monthly Oil Report

February 2013

340

350

360

370

380

390

320

330

100

120

140

160

180

1,340

1,360

1,400

1,320
Aug-11
Sep-11 Oct-11 Nov-11 Dec-11 Nov-11 Oct-11 Aug-11

1,380

May-11 Sep-11

Jun-11

February 2013

Jul-11

Oil Inventories

Aug-11 Dec-11
Jan-12 Feb-12

Sep-11

Oct-11

Jan-12 Feb-12 Mar-12 Mar-12

Apr-12 May-12 Apr-12 May-12 Jun-12

Global Research - Kuwait

US Distillate Stocks (mn barrels)

Nov-11

Dec-11

Jan-12

Feb-12

OECD Europe Total Oil Stocks (mn barrels)

Source: Bloomberg, EIA,OPEC & Global Research

Jun-12
Jul-12 Aug-12 Jul-12

US Commercial Crude Oil Stocks (mn barrels)

Mar-12

Apr-12 Aug-12 Sep-12 Sep-12

Oct-12 Nov-12 Oct-12 Nov-12 Dec-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Dec-12

180

190

200

210

220

230

240

170

1,020

1,040

1,080

1,100

1,140

1,060

1,120

Aug-11 Aug-11 Sep-11

Sep-11

Oct-11

Nov-11 Nov-11 Dec-11

Dec-11

Jan-12 Feb-12 Mar-12

150
Oct-11 Jan-12 Apr-12
May-12

155
Jun-12
Jul-12 Aug-12

160

165

170

175

180

185

Aug-11

Sep-11
Oct-11 Nov-11

Dec-11
Jan-12 Feb-12

US Gasoline Stocks (mn barrels)

Feb-12

Mar-12 Apr-12
May-12 Jun-12

Mar-12

Apr-12

Japan Commercial Oil Stocks (mn barrels)

May-12

Jun-12

Jul-12
Aug-12 Sep-12

Jul-12

Aug-12

Sep-12
Oct-12 Nov-12

Oct-12
Nov-12 Dec-12

Sep-12

US Total Crude and Petroleum Stocks Excl.SPR (mn barrels)

Oct-12

Oil Report

Nov-12

Dec-12

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Oil Report

Disclaimer
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February 2013

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