These Signs Point to Higher Oil Prices in 2013

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On Monday, oil prices climbed above $90 for the first time in over a month, as encouraging data from China subdued concerns about going off the fiscal cliff.

Those worries have helped keep oil prices mired in the $85-$90 range after flirting with $100 in mid-September.

But positive manufacturing data from China, the hopes for a fiscal cliff resolution and a subsequent market rally, along with the ever-present risk of violence and chaos in the Middle East, are all sending oil prices higher today.

Those factors, as well as several others, should keep the pressure on for higher oil prices.

Oil Prices Lifted by China, Fiscal Cliff Hopes

The chances of China's slowing economy triggering a global recession have weighed on oil prices, but recent positive manufacturing numbers from the world's leading exporter suggest activity is picking up.

For November, China's manufacturing Purchasing Managers' Index, compiled by HSBC Holdings plc (NYSE ADR: HBC), crossed the 50 point level, the dividing line between expansion and contraction.

The 50.5 reading, up from 49.5 in October, marks the first time in 13 months the index has been on the expansion side, and echoes China's government-backed PMI report, which showed a 50.6 reading for November, up from 50.2 in October.

"The numbers out of China are improving, the economy there is gaining momentum," Mike Lenhoff, chief strategist at Brewin Dolphin Securities Ltd. in London told Bloomberg News. "If we have some indication that a deal of sorts can be struck in Congress we could have a solid rebound in the market. The political posturing is going to continue for a while yet."

And, if a deal is made that actually leads to a recovery, oil prices and the energy sector as a whole will benefit more than others.

"With the up-and-down cycles we have witnessed over the last 18 months, an overriding [downward] trend has emerged. A pronounced move down in the market as a whole has usually resulted in energy share prices falling faster," Money Morning Global Energy Strategist Dr. Kent Moors recently said. "But when the recovery occurs, energy not only leads shares up, but by a stronger rate than the initial descent."

The Signs Pointing to Higher Oil Prices

A fiscal cliff resolution, which Moors expects to happen, will boost the energy market – but here's why oil prices should trend upward next year regardless of what happens concerning the "cliff."

According to Moors, six of the nine elements he regularly monitors to determine oil prices' direction are pointing north.

Opposition to Egypt President Mohamed Morsi, the fighting in Syria which has caused the U.N. to send home all non-essential staff, and growing fear of a nuclear-Iran are at the forefront of those factors.

"The developments in the Middle East keep pumping up the security premium and that is helping push crude higher, along with the hopes that a fiscal deal can be reached in Washington," John Kilduff, partner at hedge fund Again Capital LLC in New York told Reuters.

Along with the Middle East factors, inventory levels and the relationship between refinery margins (the difference between what it costs to produce oil products and the price that can be charged at the wholesale level) point to higher oil prices.

As Moors puts it, "The underlying dynamics, therefore, haven't changed. If left to its own devices, oil prices should be moving up."

Editor's Note: Dr. Kent Moors is a world-renowned energy expert and his Oil & Energy Investor service provides readers insights to oil and energy markets and the best ways to profit in them. Best of all, it's free. Click here to learn more.

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