Despite dour predictions for Middle East peace in 2013, we will not experience a conflict- induced oil shock this year. In 2013, the U.S. and Israel will have to make some serious decisions regarding what to do with Iran, and many are worried. If attacked, Iran has said it will block the vital Strait of Hormuz, with some claiming that Iran would launch a global campaign of terror. Such actions, so the argument goes, would drive oil prices through the roof, and set off a global economic crisis worse than we have ever seen.
This might make for a good screenplay for a summertime thriller, but oil prices will remain high, but stable in 2013. Conflict in the Middle East and growing demand may drive oil prices higher, but the market is prepared, and growing energy supplies will provide downward price pressures. Here are four analyses of the political risk and global energy supply/demand factors for oil prices in 2013.
1. U.S. Policy Toward Iran
The Obama administration will absolutely exhaust all efforts to find a diplomatic solution to the crisis of Iran. Assuming that White House cabinet secretary nominees John Kerry (state) and Chuck Hagel (defense) are both confirmed by the senate, Obama’s new cabinet represents a softened stance toward Iran. One of Kerry’s top priorities at the State Department will be to persuade the government of Israel to avoid saber rattling, and seek a diplomatic solution to the crises in Iran. Hagel, a Republican, was known for bucking his party on key Middle East issues, and is thought to be “soft on Iran.” Hagel did not back the troop surge in Iraq, and did not support unilateral sanctions on Iran. Whether or not Hagel makes it through the gauntlet he'll face in the senate, these nominations signal the White House’s objectives for Iran: seek a diplomatic solution and rein in Israel. Therefore, the chances of a U.S. strike on Iran in 2013 are low, and we can expect the oil markets to remain stable as a result.
2. Israel-Iran Tensions
Clearly, the Netanyahu government has a different approach to the crises in Iran and all indicators tell us he will win re-election on January 22. The chances of Israel striking Iran in 2013 — either overtly or covertly — are high, and the U.S. may be pressured into supporting this effort. As a result, Iran will likely halt oil exports as a result, but this does not matter. Last October, Rostam Qasemi, Iran’s oil Minister, announced at the World Energy Forum that Iran would halt all oil exports if sanctions against his country were strengthened. Oil prices actually fell that week. The market expects and attack on Iran, whether it comes from the U.S. or (and) Israel. We have adjusted for it already. Qasemi admitted that sanctions have caused Iranian oil exports to fall 40%. The oil market is not careening off the tracks as a result. The chances of an Israeli strike on Iran in 2013 are high, and the U.S. will support Israel through arms, aid, or troops, but the resulting rise in oil prices will not be significant.
3. Global Energy Supply
Apolitical factors affecting oil prices in 2013 are global energy supply and demand. New oil fields are being discovered in the Arctic as ice caps melt, and the U.S. is expected to begin exporting incredible amounts of natural gas, while the Israelis are still trying to discover just how much oil and gas they are sitting on. New energy supplies are being discovered on a regular basis as our technology for finding and producing them improves. Many of these resources will not be online in 2013, but some of them will, and the long-term picture for global energy supplies is quite bright. Speculators will bet against the oil market and apply downward pressure on crude prices. This will further mitigate any risk of an Iran induced oil shock.
4. Global Energy Demand
The big growth story to talk about in 2013 will be China, but it will not be that big. The Chinese economy is expected to grow at a slower rate in 2013, than in recent past. Chinese oil demand is expected to grow by 4% to 6%, up from last year by 2% to 3%. This will provide mild upward pressure on oil prices, but global energy supplies will bare this pressure. Global demand growth will be stagnant due to poor economic growth.
Today, West Texas Intermediate crude (WTI) is at $93 a barrel. I predict that growing demand and Middle East conflict will provide moderate upward pressure, but that 2013 will not bring us an oil shock. Oil prices will remain high, but stable and 2013’s average WTI price should not exceed $97 a barrel.