Energy: 2012 in Review
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Despite the relatively sideways trading range and declining volatility that the last few months of 2012 has brought the oil markets, underlying developments have remained fairly dynamic. The November election in the U.S. and change of power in China will have strong impacts on price direction, as will the developments on the production and transportation sides made earlier in the year.
2012 in ReviewThe year 2012 brought a continuation of the downward trend in oil markets which began in May of 2011. The market peaked at that time after the first four months of 2011 brought the Arab Spring and reduced oil output from Libya. The shortfall was partially made up for by the third ever IEA storage release and the ramp-up of output from Saudi Arabia. The disruption would have been greater were it not for the slowdown in economic growth in Europe. An earthquake in Japan in March 2011 brought a solid increase for LNG shipments due to shutdowns of nuclear capacity, while oil demand only increased marginally. A similar start was seen for 2012 where strength occurred early in the year before a peak in March/April. A continuation of the late-2011 rally helped, as did the second bailout of Greece on Feb 21st. U.S. economic data showed improvement early in the year, but received sobering news starting in early-May when payroll data began falling short of expectations. Both jobs and economic demand were brought forward to the winter months from the early-summer months, and made Q1 2012 economic data appear artificially better than it was. Expectations of a double-dip recession increased by summer as data slowed. The 2012 peak in prices was formed in March/April in WTI/Brent but that trend accelerated to the downside with the early-May payroll report. Worries about Greek debt resurfaced, as did concerns about Spain. It was a relaxation of conditions on emergency loans to Spain and Greece on June 29th that helped put in a bottom in oil prices. That was solidified later with a speech by ECB President Draghi on July 26th in which he promised to do whatever it takes to save the Eurozone. On Sep 6th, he launched the Outright Market Transaction plan which could buy bonds from distressed countries in order to lower their interest rates. The dollar has weakened since that time and offered support to oil prices. There were oil supply disruptions in Brazil and Yemen in 2012, but they didn't matter in face of increased shale production in the U.S. OPEC boosted production 1.14 mb/d from January through August, but cut back output by 0.99 mb/d between August and November.
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