After surging in the fourth quarter, oil prices appear to have hit a ceiling at around $100 per barrel. On Friday, crude futures fell for the third straight day, with the expiring February contract down 1.8% to $98.60 in New York trading.
This week has been a near perfect storm for oil bears, featuring a series of reports pointing to falling demand:
- A third-straight monthly drop in Chinese manufacturing activity
- A steep rise in U.S. gasoline inventories to the highest level in 10 months
- Hovensa LLC saying it will shut its St. Croix refinery, due to falling demand
- The International Energy Agency's report that global oil demand fell by 300,000 barrels per day in the fourth quarter, the first decline since the financial crisis of 2008-09. The IEA further warned of weak demand in 2012 as the global economy cools, due largely to the crisis in Europe
But any hopes that crude prices will decline significantly from here are likely to be dashed, says Jan Stuart, head of energy research at Credit Suisse.
While predicting oil prices will be "weakish" in the near term, Stuart is "significantly more optimistic on oil demand [vs. consensus] and more skeptical about noise about rapid supply gains from places like Libya."
Specifically, Stuart is "more constructive" about demand for crude than the IEA. "Our outlook is more optimistic and our baseline is higher," he says, citing Credit Suisse's analysis that demand for oil accelerated in the emerging markets in the fourth quarter and global oil demand rose over 1% vs. the third quarter.
Crude Production: A World of Potential Problems
Add to that the potential for "headline risk" out of Iran, Sudan, Russia, Venezuela, Nigeria or a host of other oil-producing regions and Stuart expects oil prices will average around $100 per barrel in 2012.
As for the current concern about Iranian production, the energy analyst says consumers of Iranian crude are seeking alternatives, which helps explains crude's surge at the end of 2011. But the idea that Iran will close the Strait of Hormuz in response to U.S. sanctions and Israeli provocations "can't happen," he says, citing the size of the channel, which is over 30 miles wide at its narrowest point.
"You need a gazillion boats to close that off [and] it would be suicidal if the Iranian Navy picked a fight with the U.S. Navy," Stuart says. "A closure of the Strait of Hormuz is not an issue. What is an issue is tightening sanctions on Iran and Iran's looming difficulty in selling its oil."
Add it all up and Stuart is optimistic about oil prices and energy stocks, which he expects will generally perform better in 2012 vs. the prior year when the Energy SPDR rose about 1%.