Please enjoy our New Year's supplement. We wish everyone a profitable 2012!
 
The Recap

At the beginning of 2011, the US economy was beginning to show some signs of revival. But the staggering effects of the economic duress consequent to the previous two year's turbulence in the housing market, only allowed for output growth in 2010 of 2.8%. In Europe, where the dimensions of the looming credit crisis were just beginning to be comprehended, only a 1.8% advance in economic growth over the previous year was recorded. For both regions, hardly sufficient to bring down continuing high unemployment rates. Most emerging markets weathered the effects of the global slowdown though, with China and India growing by 10.3% and 9.7% respectively. Crude oil prices responded accordingly, continuing to advance off 2009 lows, until mid-year. The US economy's lack of acceleration, growing problems in the EU and tightening Chinese monetary policy gave rise to skepticism demand growth could be positively maintained driving prices to yearly lows before Q2 2010 concluded. In the second half of 2010, prices reversed back upwards as the influence of social and political upheaval, in or adjacent to a substantial portion of global oil production, was perceived as potentially disruptive. In Libya, the actual loss of about 1.6MM bpd, caused an extraordinary widening of the Brent/WTI differential in Brent's favor of astonishing proportions. The fall of regimes in Libya, Tunisia, Egypt and Yemen, during Q1 2011, the so-called "Arab Spring," relieved some of the upward pressure. Simultaneously, the growing awareness of the gravity of the EU's maladies, a sputtering US economy, emphasized by a credit downgrade, as well as policymakers' failure to reach palliative resolve caused investors to leap from one asset class to another. This so-called, "risk-on/risk-off" phenomenon, exacerbating the dissolution of correlative directional indices, produced a volatility that caused, first, a $40.00 fall, followed by an about-turn higher of $28.00 for WTI. As 2011 concluded though, prices are less than $5.00 higher than they were this time last year, held up in the final few days by rising bellicosity in the verbiage of recent US/ Iranian exchanges. 2011 concludes then, very aptly analogized by New York Times correspondent, Christine Hauser, "Like a roller coaster returning to the platform."


The 2012 Macro Outlook   

For the US equity markets, as we begin the New Year, the numbers don't add up. On forward looking earnings basis, the market is extremely cheap, we are told. So, in the natural order of things, something needs to correct -- either prices should rise to near their historical norm or earnings will fall to levels that will normalize the ratio. A rising dollar, the slowdown in the chief US export market in Europe, and the troubling leading indicators in the form of the big down year for the Hang Seng Index and the Bovespa, all combine to argue for the latter. North Korea and Iran are trouble spots that could blow wide-open in the year ahead, even though we never underestimate the ability of the diplomatic dance to go on longer than imaginable. The surprise geopolitical trouble spots may well be Russia and Iraq (yes, they're back), where political change seems to be in the air. The US debt-ceiling focus debate will rage again in January as will the push for the full, year-long, extension of the employment tax reduction. The gridlock caused tumult last year, and will again this year, with amplification provided by the election cycle. It looks to be a difficult year for the global financial markets. Austerity is hitting just as economies have barely muddled through the financial crisis of nearly four years ago. The well-worn phrase that served to decry stabilization efforts as "kicking the can down the road" is coming to fruition. It appears that darn "can" stands before us, once again. As we have said in our recent daily reports, the US economic data series has been positive, but the end of the various stimulus measures, including direct aid to state and local governments lies ahead. And the end will be felt. This is shaping up to be the pivotal year, as to whether or not the economy climbs out of the ditch or slides back down the ravine.

The 2012 Petroleum Market Outlook
 
Difficulties in Europe will eventually lead to falling investor and consumer confidence which will weigh on the euro to the dollar's benefit. This should keep US borrowing costs low for both the public and private sectors, and unless conditions in Europe become harrowing, contain the virus, giving the US enough breathing room to keep the fledgling recovery advancing, albeit slowly. However, uncertainty surrounding the shape and tenor of the economic environment subsequent to the resolution of the current US spending/revenue debate will keep job growth, and consumer expectations low, as well. The developing countries will probably continue to outperform their industrialized counterparts but at levels well below those of recent years, as might be expected from export driven economies who's customers are struggling.
 
The more stable countries in the Middle East, Saudi Arabia in particular, made extravagant promises of expending social services in order to keep the regions restiveness from spreading to their populations. Even if prices fall, generating the funding will necessitate keeping production levels high. Civil war is a possibility in Iraq and Libya threatening their output. Iran is threatening to close the Strait of Hormuz threatening a substantial portion of the global total. If supply is suddenly shut in the consequences could be devastating. Price spikes to upwards of and beyond the 2008 high near $150.00 have been discussed, which if sustained, even briefly, would push Europe and the US over the cliff into recession, possibly depression. While the Iranians are benefitting from extra skin current conditions are affording them, they must also be aware of the grave consequences of miscalculation. We conclude then that the average price for WTI will be lower, $92.00-$96.00.

source: KilduffReport.Com