As I've written many times, I'm pretty bullish on oil prices over the long term. And I have to say that at the moment, I think the short and medium terms look pretty good too, both globally and in North America.
Here are the four reasons I think oil prices stay strong globally and increase in North America during 2013:
1) Saudi Arabia
The world's largest oil exporter produced 9.025m barrels a day in December, down from 9.49m b/d in November and more than 1m b/d lower than the 30-year high of 10.1m b/d set in June, according to a person familiar with the situation.
For most of 2012, a year in which global oil prices averaged over $100 per barrel for only the second time ever, Saudi Arabia produced at a rate pretty close to 10 million barrels per day.
In the past two months the Saudis have cut production by a whopping 1 million barrels per day. If they keep their production in 2013 at this nine million barrel a day level, there is no way (in my opinion) that global oil prices have a chance to drop.
I'm not sure exactly why the Saudis are cutting so dramatically when they are selling their oil for well over the $100 they believe to be a fair price, but there is no doubt it is bullish for oil prices when that much supply is removed.
2) Global Oil Demand
A second piece of information that appears very supportive of oil prices is on the demand side of the equation. It appears that the Chinese economy and its oil growth are re-accelerating.
Global consumption in the final three months of 2012 will average 90.5 million barrels a day, about 435,000 barrels, or 0.5%, more than previously forecast, the Paris-based agency said in a monthly report today. Demand will expand by 865,000 barrels a day in 2013 to 90.5 million, the IEA said, adding 110,000 barrels to its previous forecast.
It has been pretty standard that in years where we don't have a financial panic, that global daily oil demand increases somewhere around 1 million barrels per day. The IEA is suggesting 865,000 barrels per day higher in 2013. That demand growth of course comes from China, India, Southeast Asia, The Middle East and all of the billions and billions of people in the emerging world striving for a more "Western" standard of living.
If the Saudis cut production by 1 million barrels per day and demand growth increases by a similar number then the oil market will have tightened by 2 million barrels per day in 2013. There will be growth in production in North America in 2013, but even the most optimistic projections wouldn't have it offsetting even half of 2 million barrels per day.
A great frustration for those of us invested in landlocked North American oil producers has been the discounted price the oil of our companies have been receiving. Too much oil production is going to the same point in Cushing, Oklahoma where inventory is backing up depressing prices. The first point of relief for this appeared last week.
Seaway Crude Oil Pipeline Company LLC announced that service on the 500-mile, 30-inch diameter pipeline between Cushing, Oklahoma and the Gulf Coast resumed today, with approximately 400,000 barrels per day ("BPD") of capacity now available to shippers. Service was suspended on January 2, 2013 so that the remaining pump station connections could be completed, allowing capacity to be increased from approximately 150,000 BPD.
As of last week, we are now able to get an incremental 250,000 barrels per day of oil from the Cushing terminal in Oklahoma where the glut is that has been depressing WTI prices.
Even more help is on the way.
The Gulf Coast project is an approximate 485-mile (780-kilometer), 36-inch crude oil pipeline beginning in Cushing, Oklahoma and extending south to Nederland, Texas to serve the Gulf Coast marketplace. The 47-mile (76-kilometer) Houston Lateral Project is an additional project under development to transport oil to refineries in the Houston area.
These are critical infrastructure projects for the energy security of the United States and the American economy. U.S. crude oil production has been growing significantly in Oklahoma, Texas, North Dakota and Montana. Producers do not have access to enough pipeline capacity to move this production to the large refining market along the U.S. Gulf Coast. The Gulf Coast Project will address this constraint, as will the Houston Lateral Project.
Construction on the Gulf Coast Project commenced August, 2012, with an anticipated in service date of mid-to-late 2013. The Gulf Coast Project will have the initial capacity to transport 700,000 barrels of oil per day and can be expanded to transport 830,000 barrels of oil per day to Gulf Coast refineries.
Later this year, the southern leg of the Keystone XL will add another 700,000 barrels per day of transport capacity out of Cushing, which, combined with the Seaway increase adds 950,000 barrels per day of takeaway capacity.
And then even more help is coming roughly one year from now.
During a binding open commitment period held January 4, 2012 to February 10, 2012, shippers executed long-term, crude oil transportation agreements that provided the support necessary to move forward with construction of a loop (twin) of the Seaway Pipeline. The new pipeline, which is designed to parallel the existing right-of-way from Cushing to the Gulf Coast, is expected to more than double Seaway's capacity to 850,000 BPD by first quarter 2014.
With the twinning of the Seaway pipeline adding another 400,000 barrels per day of pipeline, we get to 1.35 million barrels of additional oil per day that can move out of Cushing.
Over the course of a year that amounts to 1.35 million x 365 days = 492 million barrels of oil. Total storage at Cushing as of today is roughly 50 million barrels. These pipelines are going to make a big difference to that WTI-Brent discount.
4) Rig Count
For the first time in 19 months, North Dakota (Bakken) production didn't increase in November. The month prior (October) was the smallest increase in nine months. This slowing of growth is a function of this:
"We think that this next year is going to be that transition year when the rig count stabilizes in the 200 range and the truck traffic stabilizes," Lynn Helms, director of the state Department of Minerals Resources, said in a conference call with reporters.
But the Williston Basin rig count averaged just 190 in September, 188 in October and 186 in November, slipping again to 182 by December 17, when the department released it latest oil patch statistics by way of Helms' "Director's Cut" report. The record high of 218 rigs was reached on May 29 of this year.
The chart above shows what has happened to the oil directed rig count over the past few months. After going up six-fold over the past three years, it has now leveled off. It had to, right? There aren't an infinite number of rigs.
American oil production growth will continue, but we aren't going to see the same rate of growth we have over the past year, where production has gone up by almost a million barrels per day as we increased the oil rig count by 600%.
A big cut by the Saudis, fairly robust demand growth and a slowing of the unconventional oil production surge should keep oil prices high for 2013. The addition of pipelines should eliminate a good chunk of the WTI-Brent discount as well.