Oil shifts focus from U.S. budget to normal value drivers

We are starting 2013 with many of the same major issues as we ended 2012 with. Following is my list of the main issues, events or better said potential price/value drivers for 2013. They are not in any specific order of importance.

  • Iran is a wildcard insofar as its nuclear program is concerned as well as what is real and what is bluster when it comes to dealing with the west. The US added several new sanctions over the last month or so. There was talk that Iran and the West are working toward a new round of meetings with nothing concrete yet on the table. There are many other geopolitical hot spots that could impact the flow of oil...Syria and Nigeria to name a few but Iran is the main hotspot at the moment.
  • Europe will continue to be the  number one economic hotspot in the world. The sovereign debt issues in the EU has been and will continue to have a major impact on risk asset values in 2013. The European leadership has been employing a strategy of pushing the issues as far into the future as possible with the hope that eventually the EU economy will recover enough to solve the looming debt problems. Until Europe moves into the background all of the 30 second news snippets coming from the region will continue to have an impact on equity and commodity prices. I still believe there will be a point in time in 2013 when Europe does in fact move to the background. I will be talking more about Europe in the coming days and weeks.
  • Now that the US Presidential election is over and the fiscal cliff deal has been done the markets will be looking to see how the US economy grows going forward. The US economy has been making progress and very slowly starting to see a pick up in the rate of the recovery. However, it is not a slam dunk that the US economy is ready to catapult higher especially with the extremely large unemployment and housing issues creating a major cloud of uncertainty over the US economy. Friday we get yet another snapshot of the nonfarm payroll numbers with the consensus looking for 160,000 new jobs created with the unemployment rate coming in at 7.7%. An improvement but still not enough job creation to solve the huge overhang of unemployed Americans. Overall I think the US economy will continue to pick up the pace in 2013 if the tax increases do not have a major negative impact on the economy.
  • China is the leader of the emerging market world as well as the main economic and commodity growth engine of the global economy. China is coming off of a tough 2012 which saw its economy not quickly responding to a more accommodative monetary policy that was in place for most of the year as well as a major reduction in sales of goods to Europe and to a lesser extend to the US... their main export markets. China has seen its manufacturing sector moving back above the expansion threshold with signs that the new government is clearly ready to keep the monetary policy as accommodative. All eyes will be on every macroeconomic data point coming out of China to see if in fact the new government is going to be able to pick up the pace of growth. How the Chinese economy goes in 2013 will determine how oil demand growth goes in 2013. China is the leader of the pack insofar as global oil demand growth is concerned. I am expecting that China will grow at a faster pace than in 2012 and thus I am expecting an increase in oil demand growth also.

The above are the main macros that will continue to determine where risk asset markets go in 2013 as well as where oil prices go. There are many others but I view the above as the main drivers. I think we are heading into a period where there may finally be more upside risk on oil prices with a limited downside move (geopolitics will still serve as the floor in oil prices). I am expecting oil prices to continue to trade in a $90 to $100/bbl (basis WTI) trading range for the first part of 2013 and remain very linked to the direction of the euro and US dollar. Any geopolitical event that results in an impact on supply could easily result in WTI moving back above the $100/bbl mark and remain there for a sustained period of time.

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