There are two crucial countries that are behind the recent rise in oil prices: China and Saudi Arabia.
And if these two nations keep on their current path, it will mean one thing…
Even higher oil prices in 2013. Here’s why.
How China Will Move Oil Prices
China is usually the gorilla in the room when it comes to commodities demand, including for oil.
A recovery in oil demand from the world’s second-biggest economy can be seen in the latest statistics from China.
The fourth quarter of 2012 saw a sharp rebound in China’s thirst for oil. Demand hit a historical high in December at 10.6 million barrels a day. Demand during the summer languished at about 9 million barrels a day.
This year started strongly, too. January saw China import crude oil at the third-highest rate on record.
Oil demand for all of 2013 is expected to rise by 4.8%, according to a research institute affiliated with China’s largest energy producer, China National Petroleum Corporation (CNPC). The researchers pointed to China’s economic rebound as the key factor.
Analysts from Barclays in London and Singapore agree with this assessment. They are forecasting a jump in Chinese oil demand this year of roughly 5%, or an additional 480,000 barrels a day.
Lead Barclays analyst Sijin Cheng said in a recent report that “a faster-than-expected [economic] rebound could present an upside risk to that forecast.” Cheng added “an upside surprise [was] more likely on balance.”
Of course, China is only the demand side of the equation.
The Supply Side of the Oil Prices Equation
There is also the supply side, where Saudi Arabia continues to hold the key to the direction of global oil prices.
Last summer, when Brent crude oil prices were pushing $120 a barrel, Saudi Arabia came to the rescue and began pumping nearly 11 million barrels a day.
But at the end of 2012, thanks largely to what the Saudis were seeing from the shale oil fields of the United States, Saudi Arabia drastically cut its oil production. January saw oil production from the kingdom at only around 9.25 million barrels a day.
This move may have been an indicator that the Saudis are comfortable with oil prices at $110 a barrel versus the country’s oft-repeated price of $100 a barrel for Brent crude.
The Saudis may need higher prices as Arab Spring is forcing the country to spend more on its citizens. Spending on healthcare, for example, jumped by 26% in 2012 to 12.5% of its entire budget, according to NCB Capital.
The Saudi cutbacks did serve to tighten the global oil market. According to the International Energy Agency (IEA), overall OPEC production was only 30.34 million barrels a day in January, a 12-month low.
The oil bears say not to worry, as OPEC has plenty of spare capacity that it could bring into production to lower oil prices at a moment’s notice.
It is true there is plenty of spare capacity – more than 4 million barrels a day in January. But how much of that can really be brought online?
The security concerns in northern Africa should raise a red flag about that.
An analyst at the IEA, Antoine Halff, told the Financial Times, “If capacity at some OPEC countries were to be disrupted, you could find spare capacity in other member countries eroded very quickly.”
Profiting from Higher Oil Prices
Putting the entire picture together – supply and demand -means the most likely path for oil is a grind higher as global economic activity picks up in 2013.
There are numerous ways for investors to play this trend, including with many U.S. shale oil plays.
For investors interested in a purer play on the oil price itself, there is an exchange-traded fund that fits the bill. It is the United States Brent Oil Fund, LP (NYSEARCA:BNO).
This ETF tracks the movements of Brent crude oil. It does so through the ownership of ICE Brent crude oil futures. For tax purposes, BNO is considered a limited partnership.
Related: United States Oil Fund LP (NYSEARCA:USO).
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