Category

Outlook 2012

Oil Price Forecast: Expect Oil Prices to End the Year Higher

Forecasts for oil prices in the second half of 2012 and on into 2013 are varied, but there's one point on which virtually all agree: Oil prices won't be going down.

One reason is that oil prices have already dropped substantially in recent weeks.

In fact, oil futures – as measured by the July New York Mercantile Exchange (NYMEX) contract for West Texas Intermediate (WTI) crude – closed below $90 per barrel last week, the lowest level for an active contract since October 2011. That's down $17 a barrel since the beginning of May.

Two factors have contributed to the decline in oil prices:

  • A modest increase in U.S. crude supplies – up 3.8% in April from March levels and 1.5% from a year ago – primarily due to continued low demand as a result of the slower-than-expected economic recovery.
  • Increasing strength in the U.S. dollar – the global pricing currency for crude oil – due to safe-haven buying in response to continued concerns over Eurozone instability.

Oil Prices Continue to Climb

Longer-term, however, both of those situations should stabilize, and then reverse – meaning current oil price levels will likely serve as a base for a rebound in the second half of the year, continuing into 2013.

Even so, the leading "official" sources for oil-price forecasts aren't projecting major spikes, either.

The U.S. Energy Information Association (EIA), in its most recent report issued May 8, predicted prices for WTI crude will average about $104 a barrel for the rest of the year, and that costs to refiners for all crude – domestic and imported – will average $110 a barrel.

The WTI number is down $2 a barrel from March estimates, but $9 a barrel higher than the 2011 average, while the refiners' cost figure is up $8 from 2011.

The American Petroleum Institute (API), a trade organization of more than 500 oil and natural gas companies, didn't issue price forecasts for crude in its most recent (May 18) report, but noted that increased domestic production, slightly higher crude oil stocks (374.8 million barrels) and lower imports in April should serve to keep prices stable to modestly higher going forward.

API also expressed optimism that rising crude production in North Dakota, which hit 551,000 barrels per day in March, and a possible reversal of President Obama's rejection of the Keystone Pipeline project could keep price hikes in check for the remainder of the year.

Such optimism wasn't nearly as prevalent among many private analysts and industry commentators.

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2012 Oil Price Outlook: How to Profit From $150 Oil

2011 was an up-and-down year for oil prices, but don't expect that pattern to repeat in 2012.

In the coming year, the trajectory for oil prices will be far more linear – and it's pointed up.

In fact, we could even see $150 oil by mid-summer.

There are two key reasons why:

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2012 U.S. Dollar Outlook: How to Play A Short-Term Rally

The U.S. dollar will start 2012 on an upswing – but don't let it fool you.

What we're seeing is only a short-term rally inspired by Europe's travails. In the long-term, the U.S. Federal Reserve's loose monetary policy and the United States' own debt burden will drive the greenback back down.

That's the consensus among experts who follow the global money markets and the leading currencies, including several of Money Morning's own analysts.

"The dollar is going to rally in the short-term so long as the primary liquidity mechanism (used by the world's central banks) continues to be dollar swaps," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "How long that is going to last is uncertain – perhaps March, April or beyond – but once it abates, our own enormous debt problems and inflationary policies will return to the spotlight and the dollar will quickly give up its recent gains."

Indeed, the dollar rallied in the second half of 2011, as Europe's debt battle dominated the headlines. The U.S. Dollar Index, which measures the dollar's value against a basket of foreign currencies, ended about 10% higher than its May 2011 lows, gaining almost 3% in November.

That momentum is likely to continue for the first part of the New Year, but not long after.

Several economic factors will weigh far too heavily on the currency for the upward move to continue – although it's not clear exactly when the short-term surge will lose steam. And investors who understand what's really driving the U.S. dollar's value in 2012 can avoid getting burned by the currency's long-term decline.

Short-Term Help from Europe

The U.S. dollar's short-term boost will mostly come from the need to support Eurozone governments with more liquidity.

"The ECB (European Central Bank) will be left with little choice in saving banks and their sorry sovereigns other than to print, print, print euros, and more of something almost always leads to a lower price," said CNBC News' Brian Sullivan, who thinks the U.S. dollar will reach parity with the euro in 2012.

The euro fell to a 15-month low against the dollar in the last week of 2011. It traded yesterday (Monday) as low as $1.2930.

MM 2012 Outlook
U.S. dollar value has also been driven higher recently by increased demand, since the central banks in Europe, the United States, Great Britain, Japan, Canada and Switzerland have all agreed to lower the interest rates on dollar swaps.

"Dollar swaps – you know, those little arrangements that allow foreign banks to swap their unloved currencies for dollars – … really come in handy when there's a panic and a flight to the safety of U.S. Treasuries," Money Morning Capital Waves Strategist Shah Gilani explained. Since U.S. Treasury securities must be purchased with dollars, increased demand boosts the currency's value.

However, the overwhelming long-term outlook for the U.S. currency is still bearish, mostly due to the weak U.S. economic outlook for 2012.

"The dollar is enjoying a safe-haven status, but long run I'm not a fan of the U.S. dollar," Dr. Allen Sinai, chief global economist at Decision Economics, told Forbes. "Our country has too many problems – with long run growth forecasts, deficits and how the politics of our country operates are all a negative."

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The Script for 2012 – And Your Part In It

Welcome to 2012, the third act of a tragic play. As an investor, you have a part in it.

So, if you haven't been paying attention to character development or lost sight of the plot, you're going to be frozen onstage when it's your turn to act.

Here's your script and some direction.

The set-up went like this: The audience walked into the world theater in September 2008. They took their seats and read the card left on their velvet chairs. It was short. It said:

Act I opens with the backdrop of mounting tension as insanely leveraged homeowners, consumers and banks scramble to make sense of declining home prices. The curtain lifted and the show began. The first act was dramatic, but ended in March 2009.

Act II began immediately without an intermission. Asset prices began to climb from their depths thanks to massive global stimulus.

But, Act II also revealed the tragic nature of this play. In spite of "green shoots" and rising commodity and stock prices promising a return to normalcy, the truth is that the world changed before the credit crisis and the Great Recession. There's a "new normal."

Globalization has increased labor pools, lowering costs and causing massive shifts in manufacturing realities, while productivity gains orphaned an army of white collar, middle-management sergeants, mostly in the developed world.

Seismic shifts in emerging markets were met with inflows of capital, while in developed countries, especially Europe and the United States, outflows of capital were offset by politicians borrowing more from future generations to promise retirees they would be able to retire.

As Act II comes to a conclusion at the end of this year, and Act III is going to look completely different. In fact, it might be titled

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2012 Oil Price Outlook: How to Profit From $150 Oil

2011 was an up-and-down year for oil prices, but don't expect that pattern to repeat in 2012.

No, next year, the trajectory for oil prices will be far more linear – and it's pointed up.

In fact, we could even see $150 oil by mid-summer.

There are two key reasons why:

  • Despite the economic crisis in Europe, oil demand proved resilient in 2011. It is poised to remain steady in 2012, and then escalate drastically for the foreseeable future.
  • Supplies will once again be constrained, and the potential for political upheaval in major oil-producing nations has increased.

These are the principal reasons oil prices have surged about 30% since dipping below $80 a barrel in early October. They're also why the world's upper-echelon of energy forecasters has oil prices building a floor above $90 a barrel and rising from there.

Indeed, Goldman Sachs Group Inc. (NYSE: GS) recently recommended that traders buy July 2012 Brent crude futures in anticipation of a rally to $120 a barrel. It was one of the bank's top six trades for 2012 published in its "Global Economics Weekly" report.

Barclays Capital agrees.


"Even in the worst case scenario, the downside to oil prices is unlikely to be anything as severe as during the 2008-2009 cycle," Barclays analysts Roxana Molina and Amrita Sen wrote in a report earlier this year. "As a result, we maintain our price forecast of $115 per barrel for Brent in 2012 and expect $90 per barrel to hold as a sustainable floor even under gloomy macroeconomic conditions."

As for West Texas Intermediate (WTI) crude the Energy Information Administration (EIA) expects it to average nearly $94 a barrel next year.

And even that's a conservative estimate.

"Given the oil volume constriction oncoming and the continuing increase in global demand – this drives the price, not North America or Western Europe – we will reach $150or beyond by July 4," said Money Morning Global Energy Strategist Dr. Kent Moors.

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