Crude Oil Under Pressure?

A critical indicator of economic health, the price of oil has a history of moving in tandem with the world economy; a strong economy tends to drive up demand and pricing, a weak one reflects inverse effects.

Oil continues to be the lifeblood coursing through the veins of the global economy with the U.S. holding 20.5 percent of the world’s oil consumption in 2011 according to BP’s Statistical Review of World Energy (June 2012). And while the U.S. works to increase production via oil-extracting boomtowns in remote places such as those in North Dakota, a November 2012 report by the International Energy Agency cites that the U.S. is on track to surpass Saudi Arabia as the world’s leading oil producer by about 2017 and will become a net oil exporter by 2030.

A jolting start to 2013, a climate of volatility darkens for oil outside the U.S., however.

Amid multiple supply and demand factors in petroleum market pricing, crude is an ever-present pawn whose risk premium spikes during geopolitical turmoil, often in tenuous MENA [Middle East-North Africa] regions.

On January 17, 2013, crude-oil futures rose above $95 a barrel following supply concerns relating to an attack by al Qaeda-linked militants on BP’s jointly-owned gas refinery field in Saharan Algeria, where hostages were taken. Production was halted as area British and Spanish energy field workers were evacuated. The attack had reportedly shut in over 10% of Algeria’s gas production. As of January 22nd, dozens had been killed in the attack and pundits further speculate on crude’s security premium as Africa’s biggest oil reserves in nearby Libya are ripe for targeting.

Oil rose to a four-month high after the Commerce Department announced that U.S. homebuilders ended 2012 as their best year for residential construction since the early stages of the housing crisis, largely as a result of rebuilding efforts following Hurricane Sandy. The rise in construction activity and a five-year low in jobless claims, combined with the recent refinery attack in the Middle East, are causing the market to react, helping to swing technicals to the bullish side for crude.

But is the run-up in crude destined to last?

“Now is the time when we tend to hit our seasonal peak before demand falls off,” comments Phil Flynn, Fox Business News Network contributor and Senior Market Analyst at Price Futures Group in Chicago. “The biggest hurdle for oil prices later this year will be when the Fed’s stimulus party ends, which will create pricing headwinds. The Seaway Pipeline will be the big story for oil in 2013. Barring any major disaster I don’t think crude will stay above $100 going into the year.”

Do you agree with this assessment? Tell us your thoughts on oil going into the year.

1 Comment

  1. Andrew Author January 28, 2013 (5:00 pm)

    The geopolitical and environmental implications of rising oil prices are probably the most frightening of all. Development of “new” (previously not economically viable) sources like tar sands entails all sorts of scary effects (see Politically, the higher the price of oil goes, the more money flows to potentially oppressive regimes that are even less incentivized to invest in building out a talented workforce, and more able to simply collect oil wealth as their citizens live in poverty.

    The one potential glimmer in rising prices is that it creates long-term incentives to lower fossil fuel-based energy use. Higher pump prices for a sustained period lead people to buy more fuel-efficient cars, and higher energy prices in general make alternative energy more competitive, and thus spur a virtuous cycle of development and lowered prices.

    Reply to Andrew

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