Politics, supply key to oil price in 2012

Last year there was talk of the world being in the midst of a commodities "super cycle," as prices for oil - and other commodities - appeared poised for perfection.

One year later, the oil price perspective looks like it was fairly accurate, with West Texas Intermediate averaging $95.09 US per barrel for the year while North Sea Brent averaged about $111 per barrel.

As 2012 begins, the question on the minds of many is whether that super cycle is intact and what might lie in store in the coming year.

When it comes to oil prices for 2012, one thing is certain: whatever happens will be the result of supply side and geopolitical factors. The sideshows will be the ongoing pipeline issues in North America, the environmental opposition to everything from pipelines, oilsands development or hydraulic fracturing and the growth in tight oil plays in the United States and other locations around the globe.

According to Pat Mohr, the commodities specialist at Scotia Capital, in very basic terms the direction of world oil prices will be driven by the market's changing dynamics.

"Much of what happens is going to be driven by the advent of unconventional oil supplies, whether it's tight oil or oilsands production," she said.

Prices will also be affected by the re-appearance of the geopolitical risk premium, currently manifesting itself in the sabre rattling between Iran and the rest of the world.

If there were to be an embargo of Iranian oil, replacing the 3.55 million barrels a day from Iran would provide a serious challenge to every oil producer around the world, not just those from OPEC.

Because of the political uncertainty that continues to brew, there will be increased focus on supply growth in politically stable countries such as Canada and Brazil, even though Iraq is one country with the potential for significant production growth.

According to the Washington- based consultancy firm, the Eurasia Group, Iraqi production could increase by as much as 500,000 barrels a day within the year, pushing the total barrels to 3.2 mm/d. Still, this is dependent on export infrastructure being completed in 2012, as well as finding a resolution to internal political conflicts between north and south.

Still, given the shifting market dynamics and the role Canada has the potential to play on the world supply stage, Mohr says it's absolutely key that the country move forward on building pipeline infrastructure for both oil and natural gas in order to access Asian markets because of twin factors of declining consumption and rising production in the U.S.

Demand for crude peaked in the U.S. in 2005, at 20.8 mmbbls/d, but for the nine months ended through September consumption clocked in at 19.1 mmbbls/d.

While economic growth in the United States, at 1.8 per cent for 2012 is not going to do anything to boost demand, also contributing to a decrease in crude oil demand is the rise in the use of ethanol as part of the fuel mix.

Either way, Mohr says, market diversification for Canada is critical.

"A national priority would be to build transportation infrastructure to supply Asia, China, South Korea, Japan, the Philippines, Singapore - maybe even India.

The growth for oil demand is in emerging Asia and Latin America but it is in structural decline in the eurozone," Mohr said.

"We don't have 15 years to place our oil in Asia. It has to happen faster than that."

Where does all this leave oil prices for 2012?

Mohr is forecasting prices to average $95 per barrel but admits that could be on the low side.

Indeed, Morgan Stanley is looking for $97, FirstEnergy Capital is looking for WTI to average $105 per barrel and BNP Paribas is forecasting $104.

As far as Brent is concerned, most analysts have set a floor of $100 per barrel, with Goldman Sachs going out on a limb and saying it could hit $130 per barrel in 2012.

While there's some growing uncertainty as to the strength of China's economy - Mohr is convinced that even if the country's growth slows to 8.9 per cent from the 9.1 per cent this year, it won't send oil prices plummeting.

"I expect we will see monetary policy easing in China, which will increase economic activity in 2012. They also have a lot of capacity to stimulate economic growth through infrastructure spending, and that should provide support for commodity prices," she said.

One of the driving forces behind what will happen in China is the fact it will have a change in leadership in October 2012, with the current leaders preferring to go out on a high note of strong growth.

The rosy outlook for oil prices for 2012, despite all the uncertainty brewing and falling demand in the developed world, buys Canada a bit of time to get its act together on the question of building export infrastructure. It also leaves Alberta in its bubble, effectively insulated from the economic turmoil because of its increasingly important role in the global oil supply equation.

Deborah Yedlin is a Herald columnist.

dyedlin@calgaryherald.com