5. European Union Recession
For now, Greece has been bailed out again – a move that should buoy confidence in the region and encourage demand for oil. Even with the Greek bailout, however, the eurozone is not out of the woods as nations continue to implement austerity measures to protect against the risk of default on sovereign debt.
While some experts believe the risk of defaults in the region is overblown, several economies in the eurozone continue to be in trouble. According to a recent European Commission forecast, the eurozone GDP will contract 0.3 percent, driven in part by deep recessions in several southen EU nations, including Spain and Portugal.
Either way, deepening financial and economic trouble in Europe would drop demand for oil there. However, if leaders in the region can settle on mechanisms to protect nations with financial problems from default, national budgets will not be cut to extraordinarily low levels — levels that would otherwise kill both consumer demand and business demand for oil.
6. U.S. Economic Recovery
An improved U.S. economy means higher oil prices. U.S. GDP, employment and even housing have all staged unexpected improvements in recent months. Many economists now peg a 2012 GDP increase at more than 2%. The new White House budget assumes growth of 3% by 2013. An average of more than 100,000 jobs has been created in each of the past six months. And an extension of payroll tax cuts through the end of this year may further aid the employment recovery. An extension of unemployment benefits means that hundreds of thousands of American who would have no income, will have at least enough to consume basic goods and services. The argument that Americans now drive less is not a powerful one for gas and oil demand when a healthy economy also means more consumption of oil for business, petrochemicals and jet fuel. Demand for oil-based products across the entire economy will pick up with any recovery.
7. It Is Almost Summer
In the U.S., summer vacation driving has historically boosted demand for gasoline. Over the past three or so years, however, that boost has been small, if present at all. In 2011, U.S. traffic volume decreased year-over-year in every month except January and February. But that was last year. So long as the U.S. economy continues to improve, more drivers will be on the road this summer.
8. Supply Risk
In December 2011, OPEC members produced nearly 31 million barrels a day, cutting the cartel’s spare capacity capability from 3.18 million barrels per day to 2.85 million. Saudi Arabia accounts for 2.15 million of those daily barrels of spare capacity.
Whether this data is accurate is arguable. What is not arguable is that starting to pump the spare capacity will take time, which will not be very helpful in the event that the Strait of Hormuz is closed or some other geopolitical risk is realized.
Then there is Russia, the world’s first or second largest producer, depending on which day you look at the data. The OECD is counting on Russian production to make up for some of the short supplies and to grow by 1.4% to 10.72 million barrels a day in 2012. Russia grew its production by 1.2% in 2011. An additional gain of 17% in 2012 could signify that the OECD is hoping that Russian production can grow even more. There is no guarantee that Russia will deliver.
Supply from Canada, the U.S., Australia and Brazil is expected to rise in 2012, though North Sea production is expected to fall. The OECD estimates global demand in 2012 of 90 million barrels a day and global supply essentially equal to projected supply. Nothing about that state of affairs should lead anyone to a conclusion that prices will fall.
Paul Ausick & Douglas A. McIntyre