Oil Prices: Waiting For The Slide

To be sure, the US is still the world's biggest oil consumer and oil importer, but the rearview is exactly that: the past. One mega change jumps out from the following EIA chart:


Other not-so-mega but recent and building trends not only concern the USA but almost all other major importer countries: either high stocks or record stocks, with a tendency of only growing as the sluggish economic recovery stays sluggish. Despite all that, WTI closed November just a whisker from $89 a barrel on now traditional hopes of an improving economy, a possibly weakening dollar against an overvalued euro, Middle East tensions and the Palestine vote in the UN, and not much else.

We can of course concur that the economy should do better in Q1 13, but mainly because it is hard for it to get worse. Why this should automatically bolster oil demand and draw down stocks is a totally different question that few analysts care to look at closely. This skeptical viewpoint is itself bolstered by the trend of "carbon consciousness" by several major leaders, including freshly re-elected Obama.

Also known as new energy taxes to help beat the fiscal cliff, expensive oil is a developed world favorite tax horse and cash cow. Very obviously, if the crude price shrinks, the energy tax horizon expands, suggesting developed world leaderships could or might get a lot less studiedly neutral on high oil prices while they plow along with their growth-stunting recovery attempts.

THE JOBLESS OIL-FREE RECOVERY
Rearview images of stunted recovery in 2009-2010, in Europe, show there can be a short and weak fillip to national oil demand in a few economies under the right kind of stimulus and large government cash handouts and bailouts. But these fillips do not last long. The oil-saving trend switches back in. This certainly includes the US where, even with the best case scenario for a stronger 2013, we are unlikely to see serious effective change in the demand picture for crude and oil products.

Concerning Europe, now in its sixth straight year of region-wide oil demand contraction, the latest economic numbers coming out show that even Germany is unlikely to maintain its growth profile. As we know, China's rebalancing is already having major impacts on national oil demand growth trends, with similar declining growth of demand sought and obtained by Indian deciders. The knock-on to non-oil commodities is completely predictable, and is happening.

The other major pole of the OECD group, Japan, which just "celebrated" its 7th leadership change in as many years, is in a state of perpetual deflationary decline. Japan has major demographic and anti-competitive business constraints that make it a hard bet to argue the country can show any significant growth of oil demand in 2013. Ironically or otherwise, this swivels back attention to the US oil market, which is, like the others, a "mature" market but could have the best chances among the major economies to show some growth of crude and oil products demand in 2013.

SUPPLY SIDE REVOLUTION/DEMAND SIDE REVOLUTION One intersting "tropism" of oil analysts is they tend to think oil still has 1973-status as the biggest source of global energy. At the time, oil supplied about 53% of world energy.


Today, the answer is "only just", with oil's 33% of world energy closely followed by coal's 31% using BP data for 2011.

When we get on to the supply side we find more big problems for oil bulls, and one reason so many funds imploded this year trying to aggressively invest in oil futures and ETF`s. No straight bullish trend could take hold because global and domestic supply levels are well above five-year averages. Oil prices are high, even extreme high.

The most noteworthy supply trend in 2012-2013 is the increased role of US and Canadian production, and bets this could change in 2013 are not worth taking. The combination of high oil prices, and technology change in the shape of shale oil fracking, the political quest for energy independence, even the growth of renewable and alternate energy always chipping away at oil's role and oil's share have all helped fuel the North American oil boom. To be sure, the coming erosion - rather than crash - of oil prices will hurt shale oil output growth, but as US shale gas has shown, investors and operators hang in and keep drilling even as prices drop substantially.

We have to fine down to small-scale, but oil trader-interesting technical factors to find out why oil bulls stay bullish. One of these factors is considerable growth of oil storage capacity in several OECD countries monitored by the IEA. These include the US and China, the world's two biggest importers, making for import demand solely to fill newly built capacity. In both cases, US and China, the storage capacity expansion phase is now over, kicking away this prop to global oil import demand.

BACK TO OPEC-NOPEC SQUABBLING
In both cases output is increasing - in fact and for Iraq, the IEA now claims this country - rather like the US - could or might one day get near Saudi Arabian and Russian oil production levels, but in the short term to 2017 can increase its export supply by at least 2 million barrels a day. KSA continues to brag that it can and will go on raising output. Russia denies any possibility of declining output. A growing host of presently small, new African producers and exporters are on the uptrack.

The bottom line is that quota and price squabbling will be back. OPEC may officially call for supply limitations when oil prices shrink to some "sensitive level", possibly $75 a barrel for Brent. From then on the benefits of quota cheating return. The Dark Producers - Iran - has everything to gain and nothing to lose from producing all it can and shipping its oil through Turkey, Dubai, India, Pakistan or anywhere else it can, always at a price discount.

This we can relatively confidently forecast for early 2013, a sure sign that overpriced oil is beginning to adjust to the real world. Hedge fund and broker fallout could be significant, also providing a telltale that the process is operating.