Europe’s banking and government debt crisis also will weigh heavily on the outlook, Springer and other energy market watchers agree. “Europe is going to be more of a mess. Unless Germany starts printing money or lets the ECB [European Central Bank] do it, they’re going to continue to deteriorate,” Springer says. If the ECB does engage in some form of quantitative easing, Europe will strengthen. “But I expect more turmoil and a lowering of growth prospects,” he adds.
Declining prospects for the euro currency also could feed strength in the U.S. dollar and keep a lid on oil prices. “Unless we see a total collapse of the value of the euro, any gains in the value of the USD might be more muted in 2012 and should have a very minor impact [on] determining energy prices,” Zarembski says.
Dominick Chirichella, founder of the Energy Management Institute, notes that the European situation also will have an impact on the direction of the U.S. dollar in the next six months. “Europe will make it and thus I see some USD weakness going forward [that will be] supportive for oil prices,” he says.
Along with the economic exposure of Europe, he also says demand exposure in China from what is looking like a slowing economy could have an impact on the global oil outlook. “China is the main oil demand growth engine and any impact from China is far greater than the EU and the U.S., “ Chirichella says. He adds that China and India constitute “the most important region of the world insofar as oil demand growth is concerned. Both governments will be able to orchestrate a soft landing and thus get their economies growing. The result will be decent oil demand growth from both of them.”
Oil prices now appear to be focused more on potential supply issues than slack industrial demand resulting from economic trends. “How else could one explain WTI futures trading over $100 per barrel if the market was concerned about a potential recession?” Zarembski says. “If a major European recession [were] to occur, then we may see some weakness in oil prices, particularly Brent. However, the market does not seem to be anticipating a major recessionary environment (see “Driven by supply,” below).”