Citi analysts caution that the long list of global geopolitical issues poses significant threats to major portions of the world's oil supply, and the risk of an oil price spike may be significant in 2012.
Despite the risks, Citi analysts expect Brent (light crude) prices to be range from USD100/bbl to USD120/bbl, and average USD110/bbl in 2012 and USD120/bbl in 2013. Put simply, oil supplies could be constrained for the next two to three years as there doesn't appear to be enough supply coming to market to allow for unconstrained demand growth. Citi analysts estimate the world is operating with about 2.5 million barrels per day (mb/d) of spare production capacity, virtually all of which is in Saudi Arabia, with the rest scattered around other core Gulf Organisation of Petroleum Exporting Countries (OPEC) members.
Excluding supply disruptions, they expect to see a marginal increase in spare capacity, but the margin remains slim and the potential for disruptions is significant. These include oil-disrupting violence in Iraq; tensions between Israel and Iran; US sanctions and a European Union embargo on Iranian oil; sanctions on Syria; succession and the possibility of strife in Saudi Arabia; elections in Venezuela and Angola; and ongoing violence in Nigeria, Sudan and Yemen.
Citi analysts think oil supplies may be constraining global GDP growth, and this could remain the case until there is a paradigm shift - either oil demand falls due to a transition to more of a natural gas based transportation system in some key markets, or, more likely, shale, tight oil and deepwater production reach a scale that raises global supplies. However none of these are likely to happen over the next two years.
It appears we are now living in a crude oil-constrained world and oil prices may have to stay close to the 'pain point' to constrain demand growth. This pain point is estimated to be around USD120/bbl. At that price total expenditure on energy would consume about 9% of global GDP, a level that has historically been enough to cause the world economy to slow. Citi analysts recognise however that the pain point is a moving target as it is a function of the prices of other energy sources and of the general robustness of the global economy.