OPEC the only barrier to an oil price shock this winter?

Well, I guess there's no pleasing some people as far as OPEC is concerned. Here, after the group sustained a remarkable solidarity for months on adhering to pledged production cuts-and in the process restoring oil prices from their cellar to a rather lofty level-the market now seems to be asking the group to throttle back a tad (well, actually, analysts are doing the asking, but we'll let them stand for now as a surrogate).

There is a growing belief that the market is headed for a serious price shock in the fourth quarter if OPEC does not relent on its production restraint. There are even warnings that it is in OPEC's long-term interest to boost output sooner rather than later and that a sustained oil price rise will only cripple anew a nascent global economic recovery.

What would you say if you were in OPEC's shoes? "Gee, where were all you crystal ball gazers when we decided to boost quotas almost 2 years ago to accommodate the continued boom in Asian oil demand that everyone was promising?"

Maybe that is what the group is saying, in effect, when various OPEC country officials insist that the current level of pledged production cuts remain in place until March 2000. After taking such a vicious drubbing from rock-bottom oil prices in 1998 and early 1999, is it so unreasonable to expect OPEC to enjoy the higher prices for another 6 months or so?

It is, warns the Centre for Global Energy Studies. The London think tank, noting that oil prices are up about 22% just in the past 2 months, contends that such price levels are telegraphing the extremely tight oil market to come, rather the current state of physical fundamentals.

"OPEC's 3rd round compliance slipped slightly in July, while Iraq itself managed to post a 500,000 b/d output surge," CGES said. "tocks in the OECD are now thought to have risen in second quarter 1999 by 230,000 b/d, much less than last year's 1.4 million b/d, but an increase all the same at a time when inventories remain excessive.

"The market, therefore, must be expecting an alarming decline in stock cover from third quarter 1999 onwards, for it to have become backwardated now."

So by sticking to its March 2000 target, then, the oil market is headed for a price explosion this winter, says CGES, and only OPEC can prevent that by reversing its policy of output cuts.

Just how big could the third quarter stockdraw get? Noting the recovery in demand of a 3.2% year-to-year gain in the first quarter and essentially flat demand year-to-year in the second quarter, it was OPEC's further cut in that latter quarter that prevented the price collapse from continuing. But it's taking awhile for these cuts to show up in reduced stock cover, which has essentially remained constant at 86 days' worth for all 3 quarters this year. But the approach of the fourth quarter and the cut in OPEC supplies (and a sizable drop in non-OPEC supplies) set the stage for a huge drawdown of stocks of 2.1 million b/d on average for the second half.

What this augurs is a big price spike in the winter, especially if, as is generally forecast, there is a return to normal winter weather after two consecutive unseasonably warm winters. CGES puts the zero stock-change call on OPEC oil in the second half at 2 million b/d more than the group's current output, which would put tremendous upward pressure on oil prices.

A major concern, says the analyst, is that the increase of 80% in oil prices since January is bound to eventually have an effect on oil demand. Indeed, there are signs of that already, with a predicted slowdown of gasoline demand growth in the U.S. to less than 1% year-to-year in the second half. The inflationary impact of higher oil prices has already contributed to the U.S. Federal Reserve's decision to raise its prime rate this week. And then there is the very real concern over whether the Asian economic recovery will die aborning because of an oil price spike.

So what's an oil exporting group to do?

"OPEC has over-achieved its objective of raising oil prices from the depths; surely it should now consider easing the pressure on prices before it damages its own, longer-term prospects...Higher OPEC production need not lead to lower revenues anyway, if properly managed. A 2 million b/d boost should therefore be announced in Vienna (at the September ministerial meeting), its implementation to be determined by market conditions and not pre-set dates (see Table 1)."

In the CGES price scenarios (Table 2), such a move would yield an annualized price for dated Brent next year of $18.80/bbl after dipping to $17/bbl in the fourth quarter-not bad, but well off the current level of more than $20/bbl. Making the production increase move next March, however, yields an average price of $20.70/bbl in 2000, with Brent reaching as high as $23/bbl in the first quarter. But if a mild winter ensues and higher prices spurs more non-OPEC oil on stream and OPEC still raises production by 2 million b/d in April, a $17/bbl annualized price is the result.

What makes the most sense is for OPEC not to jump the gun on projected inventory and demand levels again yet and wait until winter is over. In the meantime, it can build revenues again and sop up that red ink that hemorrhaged all over government budgets in the past 2 years. If markets get as tight as the crystal ball gazers are saying they will, then don't be surprised if the Saudis start to wink at production quotas again. The latest solidarity was accomplished with a new, more OPEC-friendly regime in Caracas and a new rapprochement with Tehran (not to mention increasing desperation in Mexico City). Perhaps these new courtesies will be reciprocated in the Saudis' usual oblique way. And when the March meeting rolls around and everyone has a better sense of where the market has been and is going, it may be Riyadh's turn again to call in a few markers.

Table 1

CGES Outlook
Output increase announced in March, implemented in April

mbpd3Q994Q991Q002Q003Q004Q0019992000
OECD consumption^47.349.049.346.248.249.847.748.4
Non-OECD consumption^27.528.328.027.828.128.927.728.2
World oil demand74.877.377.374.176.278.675.376.6
Non-OPEC supply44.445.445.145.045.346.244.645.4
OPEC NGLs2.82.82.82.92.92.92.82.9
Call on OPEC crude*27.629.129.326.228.129.527.928.3
Desired stockchange**1.1-1.7-2.91.5-0.8-2.50.4-1.2
Need for OPEC crude**28.727.426.527.827.227.028.327.1
OPEC crude output26.226.326.328.228.228.226.627.7
Supply less demand-1.4-2.8-3.02.00.1-1.3-1.3-0.6
Dated Brent ($/bbl)20.0522.523.022.120.017.717.320.7
OECD ind. stockcover (days)#565350495150
World stockcover (days)#8581777676748576

*=Assuming zero stock change. **=To keep prices constant. #=Stock at beginning of quarter. ^=The Czech Republic, Korea, Mexico and Poland are now included in the OECD in line with the IEA's figures.
Source: Centre for Global Energy Studies

Table 2

CGES Price Scenarios
Period average Brent price

($/barrel)4Q991Q002Q003Q004Q002000
Swaps Market20.119.118.217.617.218.0
Increase ann. Mar.22.523.022.120.017.720.7
OPEC output (mbpd)26.226.328.228.228.227.7
Increase ann. Sep.21.720.619.617.817.018.8
OPEC output (mbpd)26.326.328.228.228.227.7
Mild winter21.419.618.115.814.617.0
World demand (mbpd)77.077.074.176.378.676.5

Source: Centre for Global Energy Studies

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Related Articles

Study: To cool climate, eat less less meat, milk

12/15/2014

Meeting stated goals for Earth's climate requires not only using pricey energy but also spurning animal protein.

Eagle Ford economic boost jumps to $87 billion

12/12/2014 The Texas Eagle Ford shale supported more than 155,000 full-time equivalent jobs and provided more than $2.2 billion in revenue for local governmen...

EnCana, Talisman optimist on Montney, Duvernay

12/12/2014 EnCana Corp. has achieved significant cost savings in the Montney and Duvernay plays, executives told analysts while discussing EnCana's third-quar...

EPA approves Magellan’s Corpus Christi splitter project

12/12/2014 The US Environmental Protection Agency has issued a final greenhouse gas prevention of significant deterioration construction permit to Magellan Pr...

ETP eyes larger capacity for planned Bakken pipe

12/12/2014 Energy Transfer Partners LP has launched a binding expansion open season to boost capacity on a planned pipeline system that would move oil from th...

Common interests lead to Gtuit, Corval partnership

12/12/2014

Gtuit was started 3 years ago by three engineers in Billings, Mont, who developed a mobile, remote NGL capture and gas conditioning system.

OGJ Newsletter

12/08/2014

International news for oil and gas professionals

EPA air proposals should recognize progress, API official says

12/08/2014 The US Environmental Protection Agency should recognize progress that is continuing before it considers imposing costly new air quality requirement...

Keyera to own interest in new deep-cut gas plant

12/02/2014 Keyera Corp., Calgary, will take a 35% stake with Bellatrix Exploration Ltd., Calgary, in a deep-cut natural gas processing plant and related pipel...

White Papers

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Plant Design for Lean Construction - at your fingertips

One area which can provide improvements to the adoption of Lean principles is the application of mobil...
Sponsored by

How to Keep Your Mud System Vibrator Hose from Getting Hammered to Death

To prevent the vibrating hoses on your oilfield mud circulation systems from failing, you must examine...
Sponsored by

Duty of Care

Good corporate social responsibility means implementing effective workplace health and safety measures...
Sponsored by

Available Webcasts


On Demand

Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Utilizing Predictive Analytics to Optimize Productivity in Oil & Gas Operations

Tue, Nov 18, 2014

Join IBM on Tuesday, November 18 @ 1pm CST to explore how Predictive Analytics can help your organization maximize productivity, operational performance & associated processes to drive enterprise wide productivity and profitability.

register:WEBCAST


US HYDROCARBON EXPORTS Part 3 — LNG

Fri, Nov 14, 2014

US LNG Exports, the third in a trilogy of webcasts focusing on the broad topic of US Hydrocarbon Exports.

A discussion of the problems and potential for the export of US-produced liquefied natural gas.

These and other topics will be discussed, with the latest thoughts on U.S. LNG export policy.

register:WEBCAST


Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected