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Oil Prices Set To Tumble Next Year

 December 14, 2012 03:27 PM

(By Mani) The Organization of the Petroleum Exporting Countries (OPEC) seems to be happy with oil price levels for now, but unsure on what to do when fundamentals weaken in 2013.

As expected, OPEC decided to keep its production quota unchanged at 30 million barrels per day (mb/d) at its Dec.12 meeting, apparently comfortable with current prices. The group has produced an average 31.5 mb/d this year as Saudi Arabia ramped up production to calm prices and offset Iranian crude exports curtailed due to sanctions.

As usual, OPEC highlighted risks to the global economy as a concern, vowed to continue to monitor market developments and hinted it was keeping an eye on surging North American oil production.

Meanwhile, Europe's cold winter – especially compared to last year's warm one – is boosting oil demand. The US Fed's announcement that it will effectively double its current QE3 program to an injection of $85 billion per month and keep this and low interest rates in place until unemployment fell, also gave a fillip to oil prices.

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Oil was trading Friday at $86.20. up 31 cents, or 0.36 percent.

"However, expected strong supply growth in 2013 will put pressure on Saudi Arabia and other key OPEC members to curb production by around 0.5-1 mb/d in order to balance markets, while still allowing some restocking and assumed Chinese SPR fill of at least 0.2 mb/d," UBS strategist Julius Walker wrote in a note to clients.

In addition, the US State Department extended waivers on financial sanctions for key Asian purchasers of Iranian crude this week, including China, India, South Korea and Turkey which, with Japan, receive the bulk of Iranian crude exports. Japan, together with EU countries, had already received their next 180-day waiver in September.

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Short-term risks to oil price levels stem from the deterioration in Syria and the approaching fiscal cliff, implying that prices set to fall unless Saudi acts

"We still think Brent crude prices will dip to average $100/bbl in 1Q2012 as fundamentals ease – OPEC producers would need to be cutting production now to have a significant impact on 1Q balances," Walker said.

Having said that, risks remain to the upside due to ongoing tensions in a range of Middle Eastern hot-spots. As political protests continue in Egypt, news reports indicated Syrian forces had fired Scud missiles at opposition fighters, though the missiles were not thought to carry chemical weapons.

This may be a sign of weakness though as statements by both the Russian authorities and NATO suggested this week that the opposition was gaining in strength.

However, the main risk to the downside stems from the possibility of the US going over the fiscal cliff as politicians fail to agree on a deal before the end of the year
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