Notwithstanding expectations for easing in physical markets and growth in global spare capacity during 2013, current macroeconomics are uncertain and there are risks to the forecast that could push prices higher or lower. EIA projections do not assume any significant economic deterioration in the United States or the European Union (EU) next year, but oil prices could move lower on concerns about the downside risks to future consumption from the so-called "fiscal cliff" in the United States, or from concerns about EU economic stability. Oil prices could move higher as well. In China, the economy has shown signs of improvement over the past two months, as key manufacturing indexes, export volumes, and refining runs have increased, although a sustained rebound is tentative.
In early 2012, geopolitical disruptions helped bolster Brent prices. Similarly, events in Libya contributed to higher prices in early 2011. While EIA does not forecast geopolitical developments, any new geopolitical threat to supply security would affect global crude markets.
Financial market indicators also suggest that market expectations of a first-quarter price increase in 2013 are lower than in the fourth quarter of 2012. While the Brent options market is not sufficiently liquid to provide meaningful information on implied volatility beyond the prompt month, options written on West Texas Intermediate (WTI) futures contracts offer a rough idea about market participants' assessment of the likelihood of a major price move. As of the five trading days ending December 6, implied volatility for the WTI contract settling in March 2013 averaged 28 percent. At current market prices this volatility yields a calculated 95-percent confidence interval of $71 to $113 per barrel. Last year at this time, implied volatility for the March 2012 WTI contract was 41 percent, yielding a much wider calculated 95-percent confidence interval of $69 to $142 per barrel. While Brent prices are higher than WTI prices, Brent implied volatility has also decreased recently, settling at 25 percent on December 6, about a 3-percentage-point decrease from November 1, and its lowest level since the second quarter.