March 2013 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil turned lower in March, retreating by $2.27 (2.4 percent) to $93.05 per barrel. That drop was concurrent with a slight strengthening of the dollar and a continued increase in already-plentiful crude stocks, but occurred despite the lagged impacts of a jump in consumption of 516,000 barrels per day (BPD) -- to 18.6 million BPD -- during January.

The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI expanded in February (March Brent data was not yet available when this was written), to $20.70 per barrel. Brent and WTI prices had been essentially identical until the end of 2010. 

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The jump in consumption (mentioned above) and revisions to 4Q2012 U.S. GDP estimates showing growth instead of contraction were credited with pushing futures prices higher. “GDP is better than earlier estimates and a strong economy is bullish for oil,” said Michael Lynch, president of Strategic Energy & Economic Research. Not everyone is quite so upbeat, however. “Although the overwhelming evidence appears to be that there are improvements in the economy, the picture isn’t a robust one,” said Addison Armstrong, director of market research at Tradition Energy. “The jobless claims took some of the support out of the market.”

For the first time in nearly 40 years, the United States dropped out of first place among the world’s largest oil importers; China surpassed the United States in December. That same month, North Dakota, Ohio and Pennsylvania together produced 1.5 million barrels of oil a day -- more than Iran exported. Those data points demonstrate that a dramatic shift is occurring in how energy is being produced and consumed around the world -- a shift that could lead to far-reaching changes in the geopolitical order.

"A dramatic expansion of U.S. production could…push global spare capacity to exceed 8 million barrels per day, at which point OPEC could lose price control and crude oil prices would drop, possibly sharply," the National Intelligence Council, the U.S. intelligence community's internal think tank, said in its “Global Trends 2030” report in December. "Such a drop would take a heavy toll on many energy producers who are increasingly dependent on relatively high energy prices to balance their budgets."

With some analysts predicting that oil prices could drop as low as $70 to $90 a barrel -- down from the current price of nearly $110 per barrel of Brent crude oil -- a “scramble” among OPEC members for market share could ensue, said Edward Morse, an energy analyst with Citigroup and co-author of a recent report on titled “Energy 2020: Independence Day.”

Analysts say OPEC heavyweight Saudi Arabia, which controls vast reserves of oil and needs $71 a barrel to meet its budget, according to the International Monetary Fund, will do everything it can to remain the market-maker. But in that role, it will face new challenges  “Over time, it should become increasingly challenging for Saudi Arabia to ‘overproduce’ and bring down prices to punish wayward OPEC members; without this disciplinary mechanism, it is unclear whether OPEC can remain cohesive,” according to the Citigroup report.

Longer term (e.g., by 2020), cheaper heavy oil from Canada, freed from the so-called oil sands by new recovery technologies, could push similar oil from Venezuela out of the U.S. Gulf Coast market, according to forecasts. Those forecasts assume the Obama administration will approve construction of the Keystone XL pipeline, a decision the administration appears to be in no hurry to make.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.