Black gold may not glitter next year, but motorists may smile

Crude oil prices could fall sharply next year, perhaps as much as 20 percent, in what would be a boon for consumers and likely a bust for some exploration and production companies.

Major firms plan to spend billions of dollars searching for and producing oil and have been banking on stable or higher oil prices to drive their profit margins, as natural gas prices have remained low in the United States.

Motorists, meanwhile, have seen pump prices fall in recent months and are eager to see them drop further.

Auto club AAA projects that the national average price for a gallon of regular will ease slowly through the end of the year and average $3.20 to $3.40 by New Year’s Day. The average price Friday was $3.39 nationwide and $3.06 in Houston.

Gasoline prices dropped about 50 cents a gallon on average from September through early December, according to AAA.

“Clearly, lower oil prices mean lower gasoline prices for consumers,” said Geoff Houlton, a crude oil market analyst for consulting firm IHS CERA. “It sometimes takes a while for that to work itself through the system.”

Crude oil prices are driven largely by supply and demand. Other factors include refinery issues and geopolitical concerns, and even market speculation.

Since crude prices hit a high of $147 a barrel in the summer of 2008, they have seesawed.

International benchmark Brent crude closed Friday at $108.18, while West Texas Intermediate, the U.S. benchmark, closed at $86.73.

Houlton said IHS CERA forecasts that Brent will fall to about $94 in 2013 and U.S. crude will trade around $89. Other firms see Brent falling as low as $85 and West Texas Intermediate falling to around $70.

“Our forecast is definitely for a decline,” Houlton said. “We have a significant amount of supply on the market.”

Forecasts affect stocks

Houlton said his forecasts don’t include effects of unforeseen further hits to the U.S. or global economy. He said some oil market analysts believe another economic slump could send prices as low as $50 a barrel.

Oppenheimer & Co. analyst Fadel Gheit said the lower oil price forecasts for next year are why oil stocks are down in recent weeks despite relatively high crude prices elevated by fears that Middle East turmoil could disrupt supplies.

“Oil prices should be closer to $70 for WTI and $85 for Brent,” Gheit said.

Oil company profits could shrink if the projections for next year become reality.

Just last month, Houston-based independent oil and gas firm EOG Resources sounded an upbeat note as it raised its crude production growth target for this year. CEO Mark Papa said then that the only thing that “can sink the EOG Resources’ ship” in 2013 is drastically lower oil prices.

Gheit said a sharp drop could hit smaller exploration and production outfits. “If oil prices drop below $60 for a few months, half the small E&P companies could go out of business, through industry consolidation,” he said.

Houlton said companies probably will stick with their growth and spending plans because they are making long-term bets, and at least the larger ones should be able to ride out further short-term volatility in oil prices.

“You’d have to get into a situation with a real collapse in oil prices in terms of when you would see dramatic changes in capital spending,” he said.

For instance, Houston-based Marathon Oil plans to make a big push in its liquid-rich Eagle Ford shale play next year with more than a third of its $5.2 billion capital budget for 2013 devoted to the South Texas operations. The company said recently it is making the Eagle Ford a focal point of its growth strategy. Other key regions for the firm are the Bakken shale in North Dakota and the Oklahoma resource basin.

Analysts still believe the bets some companies are making are good ones.

And not everyone who follows the oil markets is predicting a drop in prices next year.

Consistent inventories

Dave Pursell, managing director and head of securities at Tudor, Pickering Holt & Co., said the real metric to look at is inventories, which consists of crude oil plus refined products.

He said inventories in Western Europe, North America and developed Asia totaled 43 million barrels above normal in October – unchanged from early in the year – and that consistent inventories reflect steady demand.

“That tells you global demand is better than people think,” Pursell said. “It tells you there’s market balance.”

Pursell said the market is not oversupplied. And, he said, if the global economy grows slightly next year, he could see oil prices ticking upward.

He said his firm is predicting Brent crude will be in the $100 to $110 range in 2013, about where it is now. He also said he expects the roughly $20 current spread between Brent and WTI prices will stick for the first half of next year and then narrow toward the back half of the year.

“If people are saying overall crude prices are going lower, I just don’t see it,” Pursell said. “For Brent to get to $90, there would have to be some economic event we don’t see happening, and the Dow Jones isn’t at 13,000.”