A tightening market for oil sees upward pressure on prices while gas is expected to remain range-bound. The thermal coal glut is expected to need some time to improve, leaving prices at a low.
Oil
Although indications are for a weak recovery in the global economy, the emerging markets lead the way in improving momentum, creating demand for real assets such as oil.
Meanwhile, spare productive capacity in the oil market remains low, making for a tight supply side. Outages in the North Sea, Yemen, Syria and stretching from China to Brazil are cutting production by over 1.2mbd, providing scope for upward pressure on oil prices. Non-OPEC outages, falling Iran production due to sanctions and a lack of spare capacity in Saudi Arabia are leading to a tighter market for Brent crude.
Bank of America Merrill Lynch (BAML) sees Brent crude oil prices hit US$120/bbl before year-end and averaging US$114/bbl in 4Q12. For 2013, BOAML sees prices averaging US$110/bbl for Brent and US$100/bbl for WTI.
Natural gas
In the US natural gas stocks are declining fast at rates not seen in the past five years, supported by strong coal-to-gas switching. However, as utilities switch back to coal for power due to the resultant higher gas prices, demand for gas is expected to stabilise. BAML believes US natural gas prices will “stay range-bound short term, capped by gas-to-coal switching but supported by coal-to-gas switching.” In 2013, normal winter weather, lower output growth and continued demand growth is expected to lead to normal storage levels by March.
Over in Europe, tight European gas inventories have enabled European gas prices to remain range-bound despite very weak demand. “With most of Japan’s nuclear power capacity still offline and Northeast Asian stockpiling ahead of winter, we believe a Pacific bid for Atlantic LNG cargoes heading into the winter could support European natural gas prices at a time when demand remains in the doldrums,” says BAML in its latest weekly energy report.
Thermal coal
High thermal coal stocks and weak demand due to a broad economic slowdown combine to create an oversupply situation in the global thermal coal market. As a result, production cutbacks and delays or even cancellation of expansion plans are expected until the market significantly picks up again.
The oversupply has created downward pressures on coal prices worldwide. For instance, European coal for delivery next year decreased to its lowest level in over two months. ARA coal fell as much as 0.7 per cent to US$96.55/t – the lowest level since 23 July, reported Bloomberg.
Meanwhile, BAML forecasts Newcastle, Australia, thermal coal prices to remain range-bound in the next 6-9 months, averaging US$91/t in 2H12, rising modestly to US$95/t in 2013.
