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4TH STRAIGHT YEARLY GAIN

Oil heads for record annual average over $111

London, December 31, 2012

Brent crude oil slipped towards $110 per barrel on Monday, averaging more than $111.65 this year, its fourth successive year of annual rises and above the previous record of $110.91 in 2011.

Brent fell on worries US lawmakers may not reach a last-minute deal to prevent a fiscal crisis, although remained on track to post a record annual average price.

High oil prices have given oil producer cartel Opec a bonanza, with oil export revenues hitting a peak of $1,052 billion, up 2.5 per cent from last year, U.S. government data showed.

But asset markets are worried the US may fail to produce a workable budget deal, triggering a mandatory "fiscal cliff" of sharp spending cuts and higher taxes for all Americans.

Failure to agree on a budget would risk plunging the U.S. economy into recession, and the lack of a deal with the deadline just hours away kept a ceiling on the prices of riskier assets, including oil.

Brent crude was down 40 cents to $110.22 a barrel by 0950 GMT after hitting a low of $110.02 earlier in the session. U.S. crude slipped 10 cents at $90.70.

"The negative consequences of the fiscal cliff appear to be too large to ignore, and overtures from both political parties have been increasing," Jason Schenker, president of U.S. consultancy Prestige Economics, said.

"Significant market moves are likely when the deal gets done - or if no deal is done before the year-end ... In any case, neither outcome is fully priced in."

EXCEPTIONAL YEAR

Commodities found some support from economic data in China, the world's second-largest economy and crude oil consumer, where factory activity expanded at its fastest rate in December since May 2011, reinforcing signs of a recovery.

But slow economic growth and ample supplies are expected to keep a lid on prices next year, with crude prices gradually slipping. Brent crude will average at $108 a barrel in 2013, a Reuters monthly survey of 26 analysts showed.

Supply is increasing, with the United States pumping the most oil in 19 years after shale oil discovery pushed production to nearly 7 million barrels per day. U.S. crude imports slipped to the lowest in 12 years.

Top oil exporter Saudi Arabia expects production increases by other oil producers to weigh on energy prices in 2013, potentially cutting into its fiscal surplus.

Saudi Finance Minister Ibrahim Alassaf said on Saturday the kingdom ran a budget surplus of 387 billion riyals ($103.2 billion) in 2012 as high energy prices and strong output levels generated revenue of 1.24 trillion riyals.

"The results of this year are exceptional," Alassaf told Al-Arabiya television, but added, "The international conditions and the increase in production by some states (in 2013) will have negative effects on prices."

Political tensions in the Middle East, meanwhile, are expected to underpin oil prices.

On Friday, Iran started six days of naval drills in the Strait of Hormuz, a vital oil and gas shipping route, the official IRNA news agency reported.

Iran has previously threatened to disrupt or close the waterway if its nuclear sites are subjected to military attack by Israel or the US. – Reuters




Tags: Oil | London | gains | Brent Crude | US budget |

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