WTI Crude Oil To Test $65 Level in 2013

EconMatters's picture

By EconMatters  

WTI closed November just shy of $89 a barrel on hopes of an improving economy. I think there is an argument for an improving economy in 2013, but it is just too early to tell how things are going to come together with the economy, and all the ramifications of basically an anti-business and social agenda political leadership of the last four years.


I am not making a political statement that there aren`t some benefits to be gained by such governmental policies, more to state the fact that with a lot of the legislative and fiscal policies of the last four years we have yet to fully understand some of the costs and unintended consequences of these policies like higher taxes, increased healthcare costs, and increased business regulation costs.


So this is an area that remains to be seen how all this plays out in the economy. Just last year many analysts were expecting 2013 to be an increased chance of a recession, we shall see.


But even with the best case scenario for a stronger 2013 economy in the US, this isn`t going to effectively change the actual demand picture for Petroleum products in a mature market like the US to any significant degree.


In addition, with the latest employment numbers coming out of Europe and the slowdown finally hitting Germany it appears Europe is not going to have a robust 2013. Asia, namely China appears to be coming off the bottom, but the days of 12% economic growth are over for the emerging market, in short, they have finally “emerged”!


China has infrastructure and inflation constraints that hamper growth levels higher than 7% going forward, and real growth may be much less than reported. This economic reality is priced into the Chinese stock market, which has had an abysmal year.


In regard to Japan, they are about to have another leadership change, the 7thone in as many years, and this economy is in a state of perpetual deflationary decline which has lasted for the last twenty years. So despite the new leadership change, Japan has major demographic and anti-competitive businesses constraints that auger more of the same for 2013.


So the US market, which is a mature market may actually have the best economy of the major economies and users of Petroleum products in 2013, and that`s not saying much from the demand side of the equation.  

US Oil Stocks 

Now we get to the supply side of the equation, and here is the problem for Oil bulls, and partly the reason so many funds got killed in 2012 trying to aggressively invest in Oil through Futures, ETF`s and the like. No established trends could take hold because the supply levels globally and domestically are well above the five-year average, and at the height of that range. So we have had a drop in WTI from $109 to $78 totaling $31 a barrel, and $100 to $84 totaling $16 a barrel which is not good if you’re a fund manager investing long-term.


The most noteworthy trend in the Oil markets for 2012 is the increased role of US and Canadian production, and it is only going to get stronger for 2013 and into the future. The trend is definitely not a fluke; we have had a nice run of over a decade of high prices which has spurred a lot of economic investment into new technologies and an increase in smaller, independent operators searching for opportunities to make money by producing oil in North America.


US Oil Production


Well, we are finally starting to see the results of the increased capital investments, and just like Shale Natural Gas, these projects once they get going stay online, even as prices drop substantially. Expect the same for Oil, as frankly, there just aren`t a lot of areas where you can make the kind of margins that are attainable in the Oil market. It is a good business to be in versus many other industries vying for capital resources.


Just to give the reader an idea of some of this dynamic change in US production numbers alone,the United States is on track for a 7% increase in oil production this year to an average of 10.9 million barrels per day. Furthermore, The U.S. Department of Energy is forecasting that U.S. production of crude and other liquid hydrocarbons will average 11.4 million barrels per day in 2013. For comparison sake Saudi Arabia's output is approximately 11.6 million barrels per day.

The only reason Oil isn`t much lower currently is that there has been a lot of increased Oil storage for newly built capacity in China and the US. For example, Cushing Oklahoma which is the location that the WTI Futures contract is based upon, had a storage capacity of approximately 47 million barrels in March 2011, with increased Capacity upgrades it stands just above 60 million barrels as of March of 2012.


US Oil Imports from Canada 

But here is the kicker, on September 30, 2011 Cushing had just under 30 million barrels in storage, as of last week Cushing has 46 million barrels stored at this location, this is an increase of 16 million barrels in one year, if we have a repeat in 2013, which all signs point to as the trend is getting stronger not weaker, than Cushing will be running out of working storage capacity of just over 60 million barrels. I am sure Cushing is building more workable storage capacity as we speak, but at some level what is the point, 2013 is when WTI starts really pricing in some of this supply glut that comes from increased US and Canadian production.

The supply glut just isn`t in WTI it is felt in total US inventory levels which to quote directly from the EIA Report: “At 374.1 million barrels, U.S. crude oil inventories are well above the upper limit of the average range for this time of year.” The US Inventory level will probably bust through the 400 million level in 2013 for the first time in history. 


Cushing Oil Storage

Prices have also been supported by international cases of many supply disruptions during the past two years, but slowly but surely, this oil is coming back online, and expect more output internationally.

Libyan oil is now up to full speed, Iraq output had been greater than expected, and is the real wildcard because they are just now starting to hit their stride, and have the potential for much more on the upside if all those new projects start producing, not only for 2013, but for the next decade plus, it all depends upon political stability in the country.


Cushing Oil Storage Dec


But here is the thing you have to remember about international Oil, everybody needs money, regardless if your extremist, Islamic fundamentalist, Democratic it still all applies to the need for money, and whomever is in charge, is going to need to monetize their resources, and these countries have very little competitive options other than oil for generating revenue, one way or another this Oil finds its way to the market.


As it happens, many of the international countries robust in Oil resources need to generate Oil revenues because a large portion of their respective populations is subsidized through Oil exports, this trend will continue as it has for the last 30 years with no major supply disruptions.


In fact, I expect OPEC will need to start entertaining supply cutbacks in 2013 to address swelling inventory levels globally, but again here is the irony, they may talk up the market with production cuts, but the fact remains, the incentive is even greater for cheating on quotas the lower the price goes, because the governments still have budgets based upon the same level of revenue, and the only way to get the same revenue with lower prices is to pump more oil.


Moreover, since a lot more capacity is capable of coming online in 2013 globally, and all these governments from Iraq to Sudan need money, expect greater achievement towards capacity which is bearish for Brent Oil prices as well, i.e., expect Brent to test the $85 level sometime in 2013.


The last decade has been exemplified by higher energy prices, and with this came increased CAP EX investment, new technologies were refined, and North America has seen a rebirth in energy activity. It all started with natural gas, and now we are starting to experience this sea change in the Oil market.


Prices in 2012 started addressing this dynamic change, but the real effects of this trend will start taking shape in 2013 as storage constraints start kicking in, demanding a re-pricing of the commodity.


After all, no matter how much the Fed devalues the dollar, unlike Gold or Silver, you can only store so much Crude Oil, and with 700 million in the Strategic Reserves, another 400 million in US Reserves, how much do we really need to store in an increasingly energy independent North American Region?


Economics will dictate that you can only build so much storage to avert the price drop from continual over supply, and right now the world produces more Oil than it consumes each day, and it has for the past 16 months, this trend will only get worse in 2013. So expect prices to finally start to address this over supply issue in the Oil Markets in 2013.


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Yen Cross's picture

$65 Hmmm. what about Brent and that contango thing?

epwpixieq-1's picture

"The U.S. Department of Energy is forecasting that U.S. production of crude and other liquid hydrocarbons will average 11.4 million barrels per day in 2013. For comparison sake Saudi Arabia's output is approximately 11.6 million barrels per day."

I am  not sure if this is being cooked quite transparently or just a wishful thinking ( I assume the first, after all the numbers can be made to present whatever one desires, of course with enough number massaging in the "right" direction ).

The U.S. Field Production of Crude Oil is literally the same as in 1951: http://www.eia.gov/dnav/pet/hist/leafhandler.ashx?n=pet&s=mcrfpus1&f=m

The graph gives you some idea about what is happening when one uses a NON renewable resource for energy trasformation.

Is a $65 price possible, well it is, the question is for HOW LONG it can stay there as we know, that the supply is DEFINELY NOT increasing, but palato-ing ( adding long term negative slope ), and the amount of $, as the Oil is currently priced in it, is constanly increasing, an this is with the simple assumption that the demand is NOT increasing ( but do not forget to tell this to the contries in Asia ).

In this EXTREMELY elementary analysis, I even do not start to consider the increment of the capital costs and even the most important factor, that ties everything, the coefficient EIOER ( Energy Invested on Energy Returned ).

topspinslicer's picture

deflation deflation wherefore art thou deflation? I have heard your siren song for 5 years now yet there is no extra change in my pocket

deflation -- not to worry benny at the fed got your back

I remember hearing oil experts a while back (one or two years I forget) on cnbc saying the exact same $65 was around the corner but no dice --

I suppose it may go lower in relation to real money however -- real money is the key not the government paper stink cheese

Alfred E. Newman's picture

You did not take into account that the Saudi's need oil at a min., at last count that was estimated at $75 min barrel.  Then there is China adding how many cars per year.

Also there are 2 European Military reports show that they are getting ready to a dip in oil supplies worldwide.

It is a short time that Mexico goes from a new exporter to a net importer.  Look at the oil drum for older production information.

Also take a look at Alaska's production the big pipe is getting aged and tougher to fill on a daily.

Now take in the water cut factors of world oil productions when you pump 99 barrels of water in the ground to get 1 barrel of oil out will not last forever.  This is happening in several places in the worlds.  Take a look for yourself again the oil drum has been a great resource of information.

disabledvet's picture

actually he didn't take into account demand. AT ALL. Saudi Arabia could become a net importer of oil from the USA under that scenario! i would agree "gasoline consumption is at it's lowest point since 1996." can we have a price shock that is lower? you bet...the last one was in 2008...but interest rates were rising then...not now. Now those rates have been flattened buy the Fed. Those rates might have BOTTOMED however.

muppet_master's picture

yr 2013

yes agree oil to $65 range AND 1) sp500 to 1000 2) gold to $900 3) 10 yr to under 1%

then 2014-2015 we will see the REAL BOTTOM..1) sp500 below 400 2) gold below $400 3) 10 yr around 0.5% = buy house here

after BOTTOM = gold will rise to $10k+ = 30X gain(silver from $4 to $200+ =50X gain), sp500 may skyrocket at first but then crash again during hyperinflation..and the 10 yr: from 0.5% to 20%+

as 10 yr goes to 20%+ odummernomics will FINALLY PANIC and then beg the chinese to buy back those kenyan-odummernomics-kenyanian junk bonds.....panic and chaos on mainstreet, hungry hoardes won't be able to afford $25 milk, $25 gasoline....etc...

hardcleareye's picture

IMHO the increased inventory is due to demand destruction.

I take issue with the future increased production of the US.

When comparing production to SA you really should look at oil production not "all hydrocarbons"....  the author gets a "naught naught" for trying to get away with that one...  sloppy at best

Gail has an excellent article on the US future production issue,


LawsofPhysics's picture

There are more than 7 billion reasons why oil will not go to $65 and every single one of those reasons wants a better quality of life.  Now with that in mind, go think about the required carbon flux through the system that is required to simply maintain that quality of (much less improve it).  Moreover, there is no longer a fucking "market" anyway, applies to oil as much as it applies to gold.  Poessession is now the law bitchez.  

Bloody sheep.

GMadScientist's picture

More war can fix that in minutes.

Market Analyst's picture

The Darwin Awards should go to Zero Hedge Peak Oil Clowns. Where do you get this nonsense that 'everybody" needs 75 dollar oil for these projects, follow the bouncing ball folks. The Saudis didn`t all the sudden stop pumping oil out of the ground when oil was at 33 dollars a barrel a couple of years ago. Anybody that tells you they require 75 dollar oil for said projects is talking their own book. Shale projects started for NG when it was well over $8, and these same projects continued when NG was under $2. Of course, somebody who owns such an such commodity, and wants the highest market price, is going to tell you they require such an such a cost to meet their costs, but follow the actual results=in the end you will take what the market dictates=and just 3 years ago it was 33 a barrel.

Oil Market is one of the biggest scams ever, no different than "Diamonds are rare crap!"

Flakmeister's picture

It is so much fun to read stuff from a person that pretends to know something...

Well, actually the Saudis cut production when oil was ~35$ a barrel for one month back in early 09...

mess nonster's picture

I wanted to give you both ups and downs, but I had to choose, so I chose down. Down for your ostrich-like denial of Peak Oil. UP for the truth that production will continue, despite price. It's true to a point. Unfortunately, from the tipping point forward, all factors conspire towards collapse. After that, oil tends to stay in the ground, for any number of reasons.

LawsofPhysics's picture

Pull your head out of your ass and look into the the amount of energy (in Joules) that has to be invested relative to the amount of energy (in Joules) that is delivered.  Once the amount of energy invested is the same as the amount of energy recovered, you are done.  

Guess what retard, in a desert, fresh water can be a rare thing.  Stupid fucking sheep.

GMadScientist's picture

Did the Saudis technically ever have the opportunity? (pretty sure those lines need to hum rain or shine, even if its mostly water keeping them at pressure)

What part of non-renewable and exponential population growth made the PDE too difficult for you to solve?


CPL's picture

Communists and their financial blindness.  WHy do you think your taxes are going to double in the next year?


Someone has to make up the difference in cost.



GMadScientist's picture

Was Dubya blowing deficits out his ass while we were at war to slurp up as much off the cookie as his daddy's buddies could get to OK any less blind?


orangegeek's picture

Yep - the price of WTI Oil is heading down. 




We could be in for a bounce over the next few months, but the bigger picture says down - in line with deflation.

Quinvarius's picture

We don't have deflation.  We have not had deflation in 100 years.  We are hyperinflating.  It amazes me that people still suck up that Fed deflation misdirection meme.  A bad economy is not deflation.

LawsofPhysics's picture

Correct.  Velocity doesn't mean shit when people start pulling their products from the market because they are tired of your paper promises.  I laugh my ass off when these people go on about how people "will always be willing to sell or trade".  Bullshit, people are pretty good at recognizing real value when it comes to their survival.

Restore the rule of laws and contracts and so much of this horseshit fixes itself.  Where the fuck is John Corzine?

Papasmurf's picture

"Restore the rule of laws and contracts and so much of this horseshit fixes itself.  Where the fuck is John Corzine?"



Quinvarius's picture

Oil is a hard market to forecast unless it is at some kind of extreme.  It is so rigged by both production cartels and governments that you can never be sure what is going on.  In general, I favor the inflation meme forcing prices higher due to production cost.  But I don't think I can come up with a tradable timeline or plan that won't get me eaten alive by the structure of the futures market.

If I had to make a prediction for paper oil short term, I'd say the government backstopped bankers only know how to sell stuff whether it exists or not.  Down is faster than up.  And since oil cannot be stored like money, no one will take delivery even if they want to.  So my guess is market structure abusive paper beat down until production is forced offline and we go into a shortage.  But, like I said, I know my limitations.  I am not comfortable trading oil and do not profess to know jack about that market.

mess nonster's picture

Refreshing honesty coupled with humility. Very rare indeed.

Go Tribe's picture

The cheaper something becomes, the more it is consumed. The more it is consumed, the less fungible it becomes. The less fungible it becomes, the more its price is supported.

Nage42's picture

>I think there is an argument for an improving economy in 2013

You lost me in the second sentance.

Sure there is an argument... it's just a totally impractical one that is contradicted by any real data you chose to look at from trusted sources (rather than goal-seek government groups).

Moving right along...

papaswamp's picture

If WTI hits $65 about half the Shale oil (LTO) will shut down. Break even price for most is ~$70 a barrel. I think we will see prices rise in 2013 as new taxes and HC plan begins to hit making worker costs rise.

mess nonster's picture

I think we will see prices rise in 2013 as new taxes and HC plan begins to hit making worker costs rise.

Are you smokin' CRACK??? How are more taxes and health care costs going to push UP oil prices? WTF? How are higher worker costs going to contribute to better employment at higher wages (the ingredients needed to drive the price of ANYTHING higher) going to produce an increase in oil prices?

Am I missinig something?

Spitzer's picture

Should be a good year for airline and gold stocks then. Unless they are hedged wrong

GMadScientist's picture

Airlines would be hedged against price increases, so no, not good for them.

BlackVoid's picture

Marginal cost of producing shale is about the same as the current WTI price, so oil price cannot drop from here, unless a big recession hits.


mess nonster's picture

Trudat. The US oil production "renaissance" is just a fever dream produced by bad Affie smack. If the WTI price dips much below 85, watch all your boyos come troopin' home from Williston with food stamp cards in their pockets.

AnAnonymous's picture

A good point: 2013. So in one year and a month, it will be answered.

Testing: yep and what? As shown by the previous years, the price increase is not strictly monotonous. It cant be. So testing $65. For how long? Can be a second while the mean price is establishing to $100.

Best: 'americans' keep trying to sell their infinite growth thingie and conceal that the ongoing struggle for life as 'americans' love to put it, is among 'americans' themselves, especially the 'american' middle class.

Idea that supply bigger than demand (and actual consumption) should signal a weaker price is another 'american' economics complete fabrication, that was only enabled by their massive streak in stealth. Sure, when you do not have to pay for the environment you live because you are stealing it, it might indeed induce some serious distortion in the way prices are formed.
But, hey, 'americans' can barely admit they have stolen so much, seeing always in others the stealers, best when those stealers are the legitimate owners of the turf. Newsflash for 'americans': you cant steal what you own.

What is going on is simply one part of the 'american' middle class starving the other part of the 'american' middle class. The current fact is that the world is overpopulated by 'americans', way too many 'american' middle classers around the world.

The only way known by 'americans' to save the middle class, the ruling class in 'americanism', is to sacrifice a part of the middle class so that the remaining part can endure.

'American' middle classers who can no longer take the oil price, can no longer drive around as they used, are given clear signs they are less and less part of the 'american' middle class and have been elected so that the remaining 'american' middle class can endure.

This 'american' author can keep propagating with its supply superior to actual consumption. As long as it puts gas in his car tank, the 'american' goal of consumption is achieved.
For other goals, like going for facts and actual patterns, well, it is now known that it is not something 'americans' excell into.

The Malamute Kid's picture

But now answer me this: Why is there a 70 cent difference between gasoline and diesel?

kaiserhoff's picture

Yes, 70 cents the wrong way.  Diesel requires less refining and has historicly been much cheaper.  Some of us have been asking this for a while.

The conventional answer is that Europe went all out for diesel a couple of years ago, and refiners are still catching up with the change.  Probably true, but our dictator-in-chief makes all transitions, especially those involving energy, torturous and twisted things.


Full Faith and Credit's picture

Obviously, multiple things come from a barrel of oil, - gasoline, diesel, and petroleum distallites. The percentage of the barrel that was allocated to each changed around 2000 to be more price friendly for gasoline, but the price of diesel fuel and say, paint thinner, have skyrocketed as a result from the "re-distribution". 

Debt-Is-Not-Money's picture

Could it be related to the large usage in conducting, and support of, our numerous overseas adventures?

Arnold's picture

I have wondered this problem. I was paying 0.85 cents a gallon for diesel when I bought my truck in 1998. Fuel was considerably cheaper than gasoline and gave better mpg per unit as well.

Today it is at 4.19 and has been as high as 5.00 per gallon in recent memory.

Road tax explains some of it, but diesel is the easiest of the fuels to crack out, usually from the dregs of other lighter process.

Removing sulfur and disposal add to cost, perhaps a marginal EPA regulation, but there are many of those that don't cost/ benifit anything.

Increased trucking costs are passed on, ultimately to the consumer, so there is no downward pressure on price.

Ultimately I think that diesel is alot safer to ship in bulk, I would guess that a big chunk of production gets shipped overseas at a price the market will bear, and we are poorer for it.


GMadScientist's picture

Whole lotta TDi engines in Zooroland.

lamont cranston's picture

Having owned (and currently) 4 diesel cars and having run an Exxon distributorship in the distant past, it's removing the sulfur to create ULSD - Ultra Low Sulfur Diesel, which is heating oil #2 reduced to 15 ppb sulfur. Still, I don't understand the 60-70¢ differential when you look at the price for #2 heating oil vs ULSD. It should be more like 30¢ IMO. But I'm no refinery expert. 

GMadScientist's picture

My guess would be both extra taxation of diesel sales at the state level (easy sell to greens...truckers pass it on) and the cost of transporting and distribution costs (it's probably a LOT cheaper along the main trucking routes like I5 CA than it is near PCH on the coast).

Do you guys live next to a refinery (to refute the thesis above)?

Arnold's picture

There seems to me there was a refinery fire about six months ago in California that took approx 15% of the nation's diesel production offline. I can understand a spike in the cost, but have not an inkling as to whether that fuel has returned to the flow.

CheapBastard's picture

Rumsfeld (where is he now?) said, 'oil is the lifeblood of the military."


China's growth may be slowing but it is still massive growth as are surrounding Asian countries.


I don't see Black Gold dropping much below $80 any time soon.

GMadScientist's picture

The only time I've heard Rummy tell the fucking truth.

I laugh when I hear people say we built the US highway system to promote commerce.

How long do you think the Chinese will continue to buy in "dollars"? We can sanction the whole world...and they'd pick up the slack while buying production along the way.

DaveyJones's picture

"Increasingly energy independent North America"   You have been following the last two decades? Oh I get it now. Is this that same country that is getting increasingly out of debt?  

AnAnonymous's picture

The statement is correct.

'American' nations are increasing energy independent and incidently so are the rest of the nations around the world.

'Americans' are working toward depletion of resources. Which means that 'americans' are working in a terminal fashion on being independent of.

Once an oil resource is depleted, 'american' nations are going to be independent from it. It already happens anytime an oil field is depleted. When it is done, 'americans' are now independent of the now depleted oil field. Aint life great in an 'american' world?

Ultimately, thanks to 'american' dedication, the entire world will be independent of oil.

Independence is a ballooney question as 'americans' love to sprinkle around.

Nobody has never worked more successful toward independence of resources than 'americans' who are making sure the end term situation will be terminal.

The question that 'americans' would prefer to elude: are 'americans' able to overcome the environment as 'americans' claim they are able to?

The question is not whether they are going to be independent of, say, oil. They are going to be.

The question is whether the world will get more without oil than when it used to swim in oil.

That is the question. Not a question about independence.

Thanks to 'americans' everyone on the planet is going to be independent of many, many resources.

agent default's picture

You mean independent in the same way a bullet through the head makes you independent of, well pretty much anything?  I got it now.

guidoamm's picture

From a technical perspective, the price of WTI has been doing a Wiley Coyte for a few years now - check chart 530 at (http://stockcharts.com/public/1163423/tenpp/5) -

The supply side, consumption side and technical price action pictures in crude all point to lower prices (use of petroleum and distillates is back at 1997 levels)

These trends have to be weighed against national and geo-political interests.

On one hand, there is a dire need to prop up asset prices in the USA and in the EU. Propping up the price of oil is one arrow in the quiver of the fractional reserve banking authority. 

On the other hand, cutting off the revenue stream of countries like Iran, Irak or Saudi Arabia may serve the West's geo strategic interests.

What to do, what to do!


tip e. canoe's picture

not to mention Russia & Venezuela

willwork4food's picture

I am confused. If SA's production is about 11mb/d with aprox the same from the US how is 4 days worth of storage capacity  (oil production) going to matter in the least? Wake me up when it's about 4 years.