Oil prices in 2013
Workers adjusting the valves of oil pipes at West Qurna oilfield in Iraq.

Equity markets around the world ended 2012 with strong annual gains extending cheers to the New Year with moderate gains. But the upbeat note failed to reach the oil market as geopolitical tensions and recession concerns added to price volatility.

The global benchmark Brent Crude average ended the year at about $112 adding 3.5 percent annually, down from the 13.3 percent jump in 2011. The American benchmark index, West Texas Intermediate (WTI) fell $7.01 or 7.1 per cent over the year.

Beginning 2013, analysts remain skeptical about the oil price movements as much of previous year's concerns are expected to carry over this year.

Credit Suisse slashed the price outlook of WTI by 5 percent to $102.75 from $106.00 per barrel while retaining the global benchmark Brent Crude at $115.

Barclays analysts are a bit more bullish, estimating Brent prices to reach up to $135 by the year end. Economists at Capital Economics suggest that Brent Crude could remain at $85 by the end of the current year, a sharp drop of $27 while WTI could reach $75.

The relative low run of the WTI prices had led to further widening of indices spread but Capital Economic analysts expect this gap could be narrowed marginally by the end of 2013.

Analysts agree on the price volatility as Middle East tensions and eurozone fears appear to be far from over.

Geopolitical tensions, especially with reference to the Middle East tensions added $10 to $15 to the price of Brent, according to a research note published by Capital Economics in December. The fears of a further decline in the US-Iran relationship as well as other political issues in the region are expected to weigh heavily on the market.

According to a report by the Financial Times, Colin Fenton, head of commodities research at JPMorgan in New York urged clients to be "prepared for rising price volatility". Paul Horsnell at Barclays in London opines that prices could exist in tandem with Middle East political situation.

The continued weakness in the eurozone and Japanese economies are also expected to weigh on global prices as they together consume about the same amount of oil as the US.

Japanese political developments will remain largely in focus as the newly elected Liberal Democratic Party (LDP) takes up controversial measures to boost growth.

Across Europe the risks are on the downside if the single currency union's financial woes get out of hand.

In the beginning of 2012, oil prices had surged on the backdrop of heightened tensions at Strait of Hormuz, a key oil transit route in the Middle East, but the prices slipped as global economic slowdown concerns set in. Demand picked up again as the weak macroeconomic outlook paved way for hopes of stimulus measures and other central bank interventions.

A last minute solution to the US "fiscal cliff" buoyed the oil prices towards the end of the year, with Brent gaining up to 49 cent on the final day and WTI jumping $1.02.

US Shale Oil Optimism
The uncertain outlook becomes especially relevant on the increasingly rampant US shale oil rhetoric and speculations of increasing Canadian oil sands production.

According to International Energy Agency's (IEA) World Energy Outlook 2012, the US is set to become the world's largest oil producer overtaking Saudi Arabia within the next decade. The country's oil output increased to 760,000 barrels oil a day in 2012, the highest annual rise since the commercial availability of crude oil in the country in 1859.

Recent US economic indicators have remained positive, increasing speculations on rising demand. US Gross Domestic Product (GDP) is estimated to remain steady in the coming years at about two to three percent although with risks at both ends.

In Canada, increased production without more demand and weak pipeline capacity has led to fall in prices. According to a Financial Times report, output surged over 4m barrels per day for the first time on the back of oil sands boom in August 2012. Since 2000, Canada's oil sands rich region Alberta has added 1.4 million barrels a day to the market and the production is expected to increase as companies looking to expand.

But despite this strong North American outlook, global production is expected to run sluggish as production in other areas such as the North Sea eases.

In the Middle East, concerns are on that Saudi Arabia could control its production to balance the market. In June last year, the country's oil output surged to over 10.1 million barrels a day for the first time in 10 years but authorities have since cuts its production to 9.5 million barrels a day.

On top of this, analysts believe that high production costs of shale oil remain a major obstacle.

"The crude oil now being extracted from shale and deepwater offshore fields is much costlier than oil extracted in the Middle East," Thomas Pugh, Commodity Economist at Capital Economics told IBTimes UK.

"US production at the intensity needed to ensure oil independence will only make sense as long as the global oil price remains at close to current levels".

But investors can look for shale to play an increasing role in global oil prices in the medium to longer term. As shale production picks up globally it will have an "incremental" part in the cost determination. The UK is expected to take up shale soon and this could be followed by countries like Germany and France as the eurozone scrambles for ways to restore its economy.

Moreover, China, the world's second largest economy appears extremely keen to enter shale production, despite indications that potential infrastructural limitations could delay its ambitions. The Indian government too is reported to be considering various aspects of shale production.

Emerging Economies

Major Asian economies started 2013 with some robust manufacturing figures, pointing to improved outlook in the coming months.

China's economy is widely expected to pick up this year with growth forecast around 8 percent or more for the world's second-biggest economy. Recent indicators, including manufacturing figures and industrial output numbers underscore the sentiment. Despite political deadlocks and concerns of policy paralysis, Indian manufacturing too increased in the final month of the previous year.

Improved emerging economy performance will point to rising demand for the Brent, points out Jason Hughes, analyst at IG Markets in Singapore while speaking to IBTimes UK.

"This will allow for Middle East producers to yield more than is the minimum required to not only produce but further develop and explore production".

But Pugh is more bearish on the matter. He suggests that the role of emerging economies or the BRICs are slightly overrated as growth in these countries will remain significantly less than expected. Although Chinese outlook indicates optimism, the Communist nation still has a long way to go in attaining export-import balance. Brazilian financial recovery remains lacklustre and structural faults in its economy poses growth challenges. Russian growth prospects are not better either, with key indicators pointing to weaker expansion.

"Admittedly, recent data from India looks hopeful but this is likely to have been boosted by festival spending and we expect overall output to fall back in 2013," Pugh said

"Taking all this into account it is unlikely that Emerging economies will add much support to oil prices in 2013".

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