Citi’s Energy Outlook For 2013

Considering this year’s rather volatile performance, one thing can be agreed upon by almost all investors – commodity investing is essentially a crap shoot. This year’s unprecedented summer drought and escalated geopolitical tensions in the Middle East have wreaked havoc on commodity markets, leaving some lucky investors with profitable returns and others with steep losses. Overall, however, commodities have been experiencing a steady uptrend for quite some time, as global demand has continuously inched higher despite the recent economic slowdown. In a recent statement, global head of commodities research at Citigroup Edward Morse warned that the “commodity super-cycle” is over and that “no longer will a pure long-only strategy bring the returns expected in 2002 to 2008, nor will conditions approximating those of the last decade return anytime soon” [for more commodity news and analysis subscribe to our free newsletter].

Citigroup’s 2013 forecast for energy commodities is somewhat mixed, though the slowdown in China’s economy is expected to have a significant impact on global demand and supply levels. Below we highlight what Citi expects to be in store for three crucial energy commodities:

Bearish On Brent

Despite a recent rise in geopolitical tensions across the Middle East, analysts believe that Brent prices are in for a modest decline over the next two years. The United States’ push for energy independence has been the single most important factor contributing to the massive stock piles of oil. With domestic oil production on the rise, demand for Brent form West Africa, Middle East, Venzuela, Mexico and other OPEC countries will likely decline.  Analysts predict the average price of Brent will come down from $110/barrel to $99/barrel. In 2014, prices are predicted to drop even further to $93/barrel.

Cloudy Forecasts For WTI

The U.S. Energy Information Administration, along with several other economists,  has somewhat of a mixed outlook on WTI  prices, as they believe significant uncertainty and potential supply disruptions could either push crude either way. According to Citi’s chief energy economist Ed Morse, however, peak oil proponents couldn’t be more wrong [see also A Deeper Look At America's Commodity Industry].

He believes that crude is at a critical turning point, as increased supply levels and slowing global demand, particularly from China, will ultimately put WTI prices around $80-$90 per barrel by 2020. His conclusions are based on the fact that upstream spending on oil & gas capital expenditures have increased six-fold over the last decade, and with the historically high oil prices in recent years, producers have been scrambling for new supplies, which will ultimately lead to lower prices down the road.

Natural Gas Could Catch Fire

Edward Morse has somewhat of a bullish long-term outlook on natural gas, as he believes reduced supply levels will have a significant impact on prices. Imports of natural gas from Canada are expected to fall next year, while exports to Mexico are projected to to be higher as a result of a loss of gas-processing capability after an explosion at the Reynosa plant. Meanwhile, power plants will likely continue to switch from coal to gas, putting additional pressure on supply levels. Citigroup estimates prices for the fossil fuel will rise 6% to $3.55 per million btu in 2013 [see also Big Money Betting On Commodity Bear Market].

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Disclosure: No positions at time of writing.