U.S. demand for oil in September fell by 5.5% month-over-month and by about 3.8% year-over-year to around 18.35 million barrels a day. For the full year, demand is expected to decline by less than 1%. Demand growth in 2013 is forecast to rise by about 1.1%.

So says investment bank Canaccord Genuity in a recent letter entitled, “Bearish US Oil Inventories: Material Build in Composite Stocks, Slight Y/Y Demand Decline.” Perhaps the most interesting observation is this one:

[T]he oversupply imbalance this year has been largely masked by non-recurring storage demand. As this demand fades, OPEC is likely to find it necessary to withdraw excess supply over the next year to maintain market balance in ‘13/’14.

In other words, consumption is down this year, and won’t be rising enough next year to support the current level of world production — particularly OPEC production. Therefore, prices will fall.

Concerning prices, the bank expects an average WTI price of $94.67 a barrel, falling to $90 a barrel in 2013. The long-term expectation is set at $90 a barrel. The forecast for Brent pricing calls for an average of $111.09 in 2012, falling to $102.50 next year, with a long-term price of $100 a barrel. The near-term differential between WTI and Brent price “reflects the elongation in the timeframe for pipeline/rail expansions to match the substantial growth in interior North American supply.”

The current WTI price is $86.11 and the current Brent price is $107.15, a differential of about $21 a barrel. Canaccord Genuity’s estimated differential in 2012 is $16.42 a barrel, falling to $12.50 in 2013, with a long-term differential of $10 a barrel.

The interesting point here is that the bank sees Brent prices moving downward to close the gap. That argument is likely based on increased U.S. production finding its way to Gulf Coast and East Coast markets, where WTI volumes will force imported Brent prices to fall.

That could happen, but the companies aiming to build pipelines and rail transportation and the crude producers are betting that the gap will close with WTI moving higher, toward Brent prices.

Paul Ausick

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