The price of oil has lately seemed to defy conventional wisdom. Despite recent lower global economic indicators, oil prices have remained strong, climbing back to about $100 per barrel. Overall, they rose about 10% in 2011.

Raymond James & Associates’ energy group thinks these higher oil prices are here to stay. For West Texas Intermediate pricing short term, the firm expects prices of $92.50—recently revised up $5 for 2012. Currently, it has a $100 Brent price forecast for 2012, going to $125 per barrel in 2013 with the Brent-WTI crude differential largely evaporating through 2012. This is not the only company with an outlook that predicts strong long-term Brent prices and WTI rising to close the gap over time.

U.S. domestic supply has actually grown, driven by horizontal drilling and its facilitating technologies. Marshall Adkins, director of energy research at Raymond James, says the domestic supply push is historic.

“For the first time in 40 years, we are seeing growth in U.S. onshore production,” says Adkins, who expects that to continue in 2012.

Rapid oil-supply growth in the central U.S. has driven a wedge between Brent crude and WTI prices. That divide has been as wide as $30 per barrel, but at press time had narrowed to about $9. Adkins believes the “invisible hand” is starting to do its work. Oil producers find ways to profit via rail, trucking, and reversing the flow of pipelines. Enterprise Products Partners LP and other pipeline operators have already announced pipeline upgrades that have meaningfully reduced the price gap between the two benchmark crudes. That oil-price differential will largely be removed by 2013, he says.

“We are modeling global recession for 2011,” says Marshall Adkins, director of energy research, Raymond James & Associates.

Pipelines are also important in the north, as Canada is one of the biggest suppliers of crude to the U.S. Raymond James is confident that this relationship will continue, notwithstanding inaction on the Keystone XL pipeline.

“It’s just another roadblock put in front of the energy sector in the U.S. In the long-term, Canada will continue to be a critical source of oil supply for the U.S. The alternative to the Keystone XL or other Canada-to-the-U.S. pipelines is the fact that oil is a fungible, global commodity. If the U.S. doesn’t want the oil and related economic benefits, Asia will,” says Adkins . In the meantime, the Brent-to-WTI price differential is likely to be in the $5 to $15 per-barrel range into mid-2012. Adkins cites this as the range sufficient to encourage trucking and rail solutions.

Unfortunately, U.S. land-based oil-supply growth has been largely offset by declines in U.S. offshore production. This is a direct result of the Gulf of Mexico drilling moratorium, whose effects should linger into 2013.

“The travesty of the moratorium is that U.S. oil supply might have been up half a million barrels per day, if we had not shut down offshore drilling for so long,” Adkins suggests. Currently, the Gulf lacks the rigs to sustain previous production levels.

“We will have a hard time reversing these offshore production declines because the rigs simply aren’t here anymore,” Adkins says. The result is Gulf production continuing to decline in 2012 by about 100,000 to 200,000 barrels per day. That should begin to stabilize in 2013.

“The key is developmental drilling has to get going again. That will take a lot of time,” he says. And while the firm projects 2013 offshore production to be down versus 2012, the magnitude of decline will not be as great.

Adkins notes that Cushing, Oklahoma, oil inventories have been falling despite adding meaningful storage capacity over the past year. And notwithstanding the growth in Rockies oil supply, overall U.S. oil inventories have also been falling. Raymond James has seen the same trend in all of the OECD countries in its global model. Further, the firm believes there is currently less than a million barrels of “true” excess OPEC productive capacity.

“Falling global oil inventories suggest things are tightening. Demand has outpaced supply growth once again, and non-OPEC countries’ production is the culprit,” says the analyst. North Sea, Brazilian, and West African production are notably lower than most had modeled a year ago, which has helped buoy oil prices.

Hart Energy Research’s report, “Oil Price Outlook for 2012,” reflects concern surrounding economic issues within the Eurozone and a tightening of monetary policy in China, curtailing oil demand and global growth.

Along with reduced crude-oil inventories and excess OPEC spare-production capacity coming back into greater focus around 2013, Hart Energy Research expects WTI will also begin to normalize, once Gulf Coast refiners gain access to Cushing, and to Eagle Ford or Permian shale oil. (For more on the Hart Energy Research forecast, see “Unconventional Oil’s Mark On U.S. Imports, Refining” on p. 23 ? in this issue).

U.S. production increased for the first time in decades from 2008 to 2010 and is likely to rise in 2011 as well.

Out of hiding, demand

In contrast to the relatively strong oil-price environment, the oil-demand outlook is not so rosy.

“We are modeling a global recession for 2011. That implies negative oil-demand growth in the OECD, particularly Europe and Japan,” Adkins says. Developing country demand still shows growth, but the pace should be subdued compared to 2010. China, for example, is still growing demand, just not as fast as in 2010.

“We assume China demand grows about 6%— half of what it had in 2010—but still fairly robust growth.” Additionally, there should be solid demand growth from the Middle East, which is consuming more energy internally in efforts to transform its societies. Adkins says overall global oil demand should be up, just not as much as many are expecting.

“We are modeling a mild global recession for 2012. We are not modeling one as severe as in 2008-2009, but oil-demand growth in 2012 should be well below the average of the past decade.”

In a recent report, the Credit Suisse commodities team also suggested a difference between the economic crash of 2008 and present conditions. Unlike prices in the summer of 2008, oil futures prices now are backwardated.

In the short term, the entire system hinges on Europe, which despite some positive murmurings, still has substantial uncertainty around its economy. Adkins believes in a year, the European problem will have been solved one way or another, and oil prices will drift higher as world banks inflate the money supply. Over the course of 2012, he thinks WTI and Brent will move close to parity, and anticipates that WTI prices will rise toward Brent, rather than Brent falling to WTI.

“An extreme lack of confidence adds downside pressure to what currently is at best only sluggish oil-demand growth, at least at a global level. We expect Brent average prices to continue to deflate slowly this quarter, with no meaningful recovery in first-quarter 2012,” Credit Suisse analysts wrote in their report. At press time, the Credit Suisse team indicated it would not update its Brent forecasts in January, but would modify WTI expectations at that time. In December, it called for $86 oil.

Credit Suisse analysts also think that the short-term price weakness will yield to strength in 2013 and beyond, once the European crisis is laid to rest.

“Once the macro dust settles, strong underlying oil-demand growth trends and any of a number of issues on the supply side should become more apparent,” they noted.

Eventually, says Adkins, higher oil prices will once again begin to limit economic growth as the commodity price taxes development. “Long-term, we see oil prices moving higher to force OECD demand lower. If global oil-supply growth remains static, higher prices are the only way to allow the developing world (China and the Middle East) to grow oil consumption. In other words, once the global economy begins to grow again, the world will have to ration the available oil through higher prices. That means higher crude prices in 2013 and beyond.”

Credit Suisse commodities analysts, too, believe the Brent price will flirt with the edge of “affordability and political tolerance,” which they model as $120 per barrel, and WTI will not be too far behind. That level, they believe, will be reached in the second half of 2013.

What do oil producers themselves, those who have the most at stake, think? In the Barclays Capital Global 2012 E&P Spending Outlook, some 350 companies were surveyed in November. They reported using a conservative average WTI price of $87 for their 2012 budgets.