2013 Crude Oil Outlook: Supply & Demand
Oil Demand Shift
From 2000 the increasing industrialization of the developing world has been the primary catalyst driving the demand for global crude oil. Among non-OECD nations, China and India have led the charge, with Chinese oil demand growing at a torrid 6.7% per annum rate and India’s oil demand growing at 4.0% per annum. Overall non-OECD demand for oil has increased at a comparable rate of 3.6% per annum, with the Asia/Pacific region growing oil demand at roughly 2.7%. Developed nations, however, have seen diminishing oil demand with a negative -.04% per annum growth rate.
As I shall point out, the decline in OECD oil demand is not enough to offset the rising demand for oil from the developing world, so the net result going forward will be an increasing supply/demand imbalance. My analysis points to an increasing deficit — gap in global wellhead oil supply — to meet demand.
While demand is being driven by the developing nations, supply from both the OPEC and Non-OPEC producing regions are struggling to meet demand. Since 2000, OPEC wellhead oil production has increased at a per annum rate of 1.3%, and non-OPEC production has actually declined slightly at a per annum rate of -0.3% — combined, a yearly increase of 1.0%.
Despite global economic growth weakening in 2012, from the depths of the Great Worldwide Recession in 2009, global oil demand has increased roughly 1.7% per annum, while supply has increased about 1.5% over the comparable period maintaining our consumption/production gap.
WTI and Brent Oil Prices in the Next Few Years
For 2013, WTI should average closer to the last two years’ average of roughly $94/bbl. By 2014, I see the global consumption/production gap beginning to widen, as global economies begin to improve led by developing nations.
WTI should average higher in 2014 from $95 to $100 per barrel aided by better economic growth toward the end of 2013 into 2014, and lessening supply bottlenecks in Cushing, Oklahoma as crude oil logistics increase oil from the Mid-Continent to the Gulf Coast refiners. The WTI-Brent differential should continue to narrow with WTI increasing and Brent prices moving lower.
Indeed, going back to 1989 I see a strong correlation of +82% between WTI prices and the global consumption/production gap. While correlation does not prove causality, nevertheless, since 1989 we can see a positive lag relationship between WTI and the global consumption/production gap. Particularly, once the difference between oil consumption and production turned positive in 1999, we begin to see an acceleration in WTI prices, as global supply begins to outpace global demand.