“Nothing To Spare”, Crude Could Reach $200 (Erste Group’s Complete 2012 Oil Price Outlook)

The latest in a series of re­ports eval­u­at­ing the fu­ture of the en­ergy mar­kets, es­pe­cially in the con­text of the in­creas­ingly in­ev­it­able Ir­a­ni­an con­flict, may just be the best and most com­pre­hens­ive one (not just be­cause it looks at the com­mod­ity from an "Aus­tri­an" angle). In 82 pages, Aus­tri­an Er­ste Group has ex­trac­ted the key as­pects and vari­ables for the world oil mar­ket and come up with a simple con­clu­sion: "noth­ing to spare." To wit: "We see the risks for the oil price heav­ily skewed to the up­side. At the mo­ment, the mar­ket is well sup­plied, but the smoul­der­ing crisis in the Per­sian Gulf could eas­ily push oil prices to new all-time-highs should it es­cal­ate. We be­lieve that new all-time-highs can be reached in H1, at which point we could see de­mand de­struc­tion set­ting in. We fore­cast an av­er­age oil price (Brent) of USD 123 per bar­rel between now and March 2013…The lat­ently smoul­der­ing Ir­an crisis seems to be close to es­cal­a­tion. The most re­cent man­oeuvres, os­ten­ta­tious threats, sanc­tions, em­bar­goes and the shad­ow war cur­rently on­go­ing, have heated up the situ­ation fur­ther. It seems we may soon see the last straw that breaks the camel’s back. Even though Ir­an could prob­ably only main­tain a block­ade of the Straits of Hor­muz only for a very lim­ited peri­od of time, the con­sequences would still be dra­mat­ic. The oil price would def­in­itely set new all-time-highs and could reach levels of up to USD 200." En­joy those price dips while you can.

Brent oil set a new av­er­age all-time-high of USD 111/bar­rel in 2011. This price also ex­ceeded the 2008 and even the 1979/80 ref­er­en­tial val­ues on an in­fla­tion-ad­jus­ted basis. The main drivers of the oil price last year were the sup­ply side and the un­rest in the MENA re­gion. Not even the lat­ent wor­ries about an eco­nom­ic slump in Europe, the US or es­pe­cially China had much of an im­pact on the oil price. The in­creas­ingly ex­pans­ive mon­et­ary policy of the Fed­er­al Re­serve, the ECB, the Bank of Eng­land, and the Bank of China also came with a stim­u­lat­ory ef­fect. Giv­en that the Fed will now con­tin­ue its zero-in­terest-rate policy at least un­til the end of 2014, this should sup­port the en­tire com­mod­ity sec­tor, oil and gold in par­tic­u­lar. This scen­ario seems to lay the basis for new all-time-highs.

Last year, we saw mainly up­side risks for the oil price, ex­pect­ing the wave of re­volu­tions to con­tin­ue rolling across the MENA re­gion more vig­or­ously than it ended up do­ing. For now the spill-over of the re­volu­tion has been pre­ven­ted by ap­pease­ment meas­ures worth bil­lions taken by the vari­ous gov­ern­ments. However, the sys­tem-im­man­ent prob­lems have only been covered up, not re­solved. The ini­tial eu­phor­ia of the Ar­ab Spring has mean­while giv­en way to a sense of sobri­ety.

The lat­ently smoul­der­ing Ir­an crisis seems to be close to es­cal­a­tion. The most re­cent man­oeuvres, os­ten­ta­tious threats, sanc­tions, em­bar­goes and the shad­ow war cur­rently on­go­ing, have heated up the situ­ation fur­ther. On top of this, the situ­ation in Ir­an seems tense, with a cut in sub­sidies and the on­set of hyper­in­fla­tion ex­acer­bat­ing the crisis. It seems that we may soon see the last straw that breaks the camel’s back. We will dis­cuss the polit­ic­al risks and their ef­fects on the oil price in the fol­low­ing pages.

On top of the afore­men­tioned is­sues, it seems that OPEC cur­rently con­trols the price more tightly than ever be­fore. In the cur­rent en­vir­on­ment, prices of USD 90-110 should not (yet) cre­ate any form of de­mand de­struc­tion. It seems as if the oil price were to test the pre­cise price level of that crit­ic­al threshold and then rise a bit high­er with every at­tempt. They say that the cure for high prices is high prices, as a res­ult of which both de­mand in the OECD coun­tries and sup­ply (un­con­ven­tion­al oil, new pro­duc­tion meth­ods, etc.) seem to ad­just.

A com­par­is­on of the oil price fore­casts from vari­ous oil pro­du­cers re­veals that, in the peri­od of 1999 to 2010 Mex­ico, Saudi Ar­a­bia, and Rus­sia made the most ac­cur­ate fore­casts. All three of them also came closest to the ac­tu­al price last year, which is why it makes sense to listen to their ex­pect­a­tions. For 2012 they pre­dict sub­stan­tially high­er oil prices. Saudi Ar­a­bia ex­pects an av­er­age WTI price of USD 97, Mex­ico fore­casts USD 116, and Rus­sia USD 120/bar­rel. Ir­an has giv­en the highest fore­cast at USD 137/bar­rel.

The Aus­tri­an School of Eco­nom­ics of­fers in­vestors a new angle on fore­cast­ing as­set and com­mod­ity prices. In con­trast to tra­di­tion­al eco­nom­ists, "Aus­tri­ans" do not re­gard the rising de­mand for oil or oth­er com­mod­it­ies as de­term­in­ing factor for rising prices. Rather, they view the on­go­ing in­crease in money sup­ply, which in our par­tial re­serve bank sys­tem en­tails an ex­pan­sion of cred­it, as the cru­cial factor of rising prices. For Aus­tri­ans, one thing is cer­tain: the more mon­et­ary units cir­cu­late, the lower their in­trins­ic value. As a res­ult, the sub­stan­tial in­crease in oil prices in the past year has come as no sur­prise, as for Aus­tri­ans it is not so much the de­mand for a good such as oil that de­term­ines a price in­crease, but simply the fact that, es­pe­cially since 1971, more and more pa­per and di­git­al money has been cir­cu­lat­ing glob­ally. The fol­low­ing chart sup­ports this fact im­press­ively. While the av­er­age in­fla­tion-ad­jus­ted oil price had been USD 6.1/bar­rel with­in the frame­work of the Bretton Woods agree­ment, it em­barked on a rap­id in­crease once gold had been dis­carded as mon­et­ary basis. Since the end of the gold stand­ard the price of one bar­rel of oil has av­er­aged USD 20.6 per bar­rel.

Full re­port:

Spe­cial Re­port Oil – Noth­ing to Spare – 2012