international turmoil will determine crude oil prices in 2012; oversupply will determine natural gas prices
As much international turmoil as we saw in 2011 in the crude oil markets (Egypt, Libya, Bahrain) and in the financial markets (Euro and the European Union), we do not see any less turmoil for 2012. As is usually true, some considerations will be bullish and some will be bearish for crude oil prices. The trick will be to recognize which considerations have the greatest impact on crude oil buyers and traders at any given time.
As usual, when we make a list of bullish considerations, turmoil in the Middle East is again #1. Iran will continue to agitate in Iraq and will continue to test the international community's limit to gain control of shipping lanes in the Persian Gulf and through the Strait of Hormuz. Iran will also continue to look for ways to destabilize the regime in Saudi Arabia and other Sunni strongholds in the Middle East. Iran's ambition to become a nuclear power and its clear advantage in conventional military power will keep the Middle East at the top of the list for years to come.
On the European front, the major powers within the European Union will wrestle withand with the issue of sovreign debt. Economists and politicians in Europe seem to have forgotten all the lessons of the 1930's and seem determined to use austerity measures to resolve these problems. Economic growth in Europe will be sluggish at best and European economies may well slide into another deep recession this year. Finally, major powers in Europe will work hard to maintain the Euro as a viable currency. Problems in Europe will keep crude oil buyers and traders on edge as a bearish consideration as the risk of economic recession will lead to further declines in demand for refined products.
Domestically, we saw substantial growth in U.S. NGL production as gas producers continued to aggressively expand natural gas production (primarily in Texas, Louisiana, and PA/WV). The year-to-year increases in gas production were 3-4 BCFD but domestic gas demand did not keep pace. The market maintained the supply/demand balance by backing out imports – both waterborne LNG imports and pipeline shipments from Canada. The “low hanging fruit” has been picked and U.S. gas producers will now be faced with increasing competition with each other. Until Q4 2011 weather turned very mild, we had forecast the meltdown in natural gas prices for 2013. We now expect significant bearish pressure to push gas prices in some regional markets below $3.00 per MMBtu for Q2 and Q3 2012.
