Crude Oil Price and Market Analysis

                The oil market is consistently volatile and has large price fluctuations due to macroeconomic and geopolitical factors. It is also clear that world oil consumption is growing. World oil demand has grown to 90 million barrels per day. In recent years oil has seen large swings in price to a maximum of 145 USD per barrel in 2008 and a low 40 USD a barrel in 2009 due the global recession.  However, in 3 to 4 months after reaching these lows, oil rebounded to reach an average of 100 USD for Brent crude oil during 2010-2012.  OPEC and more specifically Saudi Arabia no longer have the ability to influence the market as they once did, they no longer have the necessary spare capacity and the recent events of the Arab Spring have increased the regions need for oil revenues to maintain stability. Crude oil is fundamentally driven by global supply and demand.  Although oil is used as a commodity asset class in financial markets and can be influenced in the short term by speculation from traders, especially large hedge funds, oil has the consistently returns to the fundamentals, the laws of supply and demand.

                Examining the fundamentals:

                This is a graph produced by the U.S. Energy Information Administration (EIA) which tracks the change in the supply and demand for crude oil.  This shows that demand for oil is currently at 89 million barrels per day and supply is at 88.5 million barrels per day.  According to these figures world has no cushion in terms of oil supply, while the world economy is forecasted to grow by 3.3 percent rate by the IMF.  Oil production is barely keeping up with the demand and is supporting the high price levels currently seen in the market.  The supply of oil will need to grow at least 7 percent a year in order to compensate for the declination rate of existing wells and the predicted 3 percent growth of the global economy.  Furthermore a significant proportion of wells have high costs of production as they come from mature fields.  North Sea oil is a prime example of this as many wells are not profitable with an oil price below 90 USD. This also provides additional support to market as it creates a price floor that, when breached will cause high cost wells to be shut down.

The global economy is being sustained, in part, by the nascent recovery of the U.S. economy.  There are new theories stating that the U.S. economy will become much less dependent on foreign oil in the coming years due to recent discoveries of shale oil and gas.  In order assess this theory one must analyze the current status of the U.S. energy balance and evaluate how much the U.S. actually depends on foreign oil.

According to WTRG Economics the current U.S. consumption of oil is approximately 19 million barrels per day.  U.S. consumption reached a peak in 1979 at approximately 21 million barrels per day.  Due to rising oil prices and the Iranian revolution the U.S. curtailed its consumption and brought it down to a low of 14.5 million barrels per day in 1985. In the years since, U.S. consumption of oil has steadily increased to again reach the high of 21 million barrels of oil per day from 2003 to 2007.  In response to the global recession in 2008, the U.S.  decreased its consumption of oil and it has held steady at around  19 million barrels per day from 2008 to present.  With the U.S economy forecasted to grow 2.1% by The Economist  and it would be reasonable to expect U.S. consumption to increase.  Turing to the supply side,  we have the following information by the EIA. U.S. oil production peaked in 1985 at 9 million barrels per day.  Production steadily declined until it reached an all a low of 4.9 million barrels per day in 2009.  Since then there has been an uptick in production and in 2011 the U.S. produced 5.6 million barrels per day.  With new discoveries the EIA projects that the U.S. will increase production by 700,000 barrels per day during 2012 and reach 6.8 million barrels per day in 2013.  This means the U.S. will remain a net importer of at least 12 million barrels per day.  Increased U.S. production will not substantially affect the balance of the global crude oil supply and demand as its imports will support the market. 

One of the largest factors that has contributed to the increased demand of oil has been the rapid growth of China as it has developed.  China is a new force in the global economy and even though its growth has decreased to 7 percent a year it still retains considerable influence.  While its growth is no longer in double digits, its demand for oil will continue to increase with its GDP. While there is concern about its dependency on exports, research by Credit Suisse has shown that consumer spending has steadily increased at a 10% rate in recent years.

By examining the long term chart of the price of oil from 1947 to 2012, produced by WTRG Economics, it shows how major world events can affect all markets including the oil market and can cause crude oil to test its support levels.  This chart also reveals that no matter how large the event, the price of oil ultimately returns to its equilibrium price level determined by the supply and demand of the physical market.  This chart also illustrates that from 1987 to 2005 the price of oil was kept artificially low due to the influence of swing producers inside OPEC.  Once OPEC´s spare capacity ceased to exist in 2005, the price of oil returned to supply and demand fundamentals.  Taking into account inflation what we interpret from this graph is a current support level of 80 USD a barrel for WTI and 100 USD for Brent. 

It is Hispania Petroleum S.A.´s analysis that in the next 5 years oil prices will average above 100 USD a barrel for Brent.  It is also clear that oil prices will continue to steadily rise in keeping with global demand at the very least to keep up with inflation.