Saudi Arabia's Oil Minister Ali Naimi told a Houston conference last week of his doubts about the prospects for significant growth in demand for oil in the short term.
He reiterated his view given before the recent meeting of Organization of Petroleum Exporting Countries ministers that there are "absolutely no plans" for OPEC to raise oil production before the end of March 2000, when the current cutbacks agreement expires, and that the present output targets could be extended beyond that date if market conditions require.
Reuters reported that the minister said, "One of the problems with price, of course, is that there is a lot of hype in the price today. I am convinced, as also are other ministers, that what is driving prices is not real growth.
"I think there is at least $2-4/bbl in the price which is psychologically driven rather than demand drive. What happened recently was that prices heated up to over $24/bbl, but we could see through that. That was not really driven by genuine demand. That was more or less speculation driven and therefore we did not react."
The price for prompt Brent crude fell from the $24/bbl mark to about $20/bbl for a while, but has in the last couple of weeks recovered to the $22-23/bbl range, prompting London's Centre for Global Energy Studies to explain that, despite the price trough, the fundamentals of the crude oil market are getting stronger, which explained why the market recovered its composure. The most recent information, said CGES, suggested that there was a 700,000 b/d stock-draw in Europe in September, and that the OECD industry's inventories will have declined by around 200,000 b/d in third quarter 1999.
"While hardly setting the market alight, these numbers ought to be seen as an early indication of the physical tightness to come. Moreover, OECD inventories do not tell the whole story. It seems logical for the companies to run down stocks held in third party storage first and then chip away at their own inventories, aided by a growing backwardation."
With market attention turning to winter weather and subsequent fuel demand changes, CGES said a cold winter would add 200,000 b/d to world oil demand over 6 months, thus tightening the market and boosting the first quarter 2000 average price for dated Brent to $23.50/bbl.
"With a cold winter," said CGES, "the price of dated Brent would remain above $20/bbl for the whole of next year, assuming OPEC raises its output to 28.2 million b/d from April, yielding an annual average price for 2000 of just below $22/bbl.
"On the other hand a mild winter, reducing oil demand by 200,000 b/d, would ameliorate the oil price rise over the coming months, with dated Brent averaging $20.50/bbl over the winter.
"Lower oil prices would stimulate oil demand growth later in the year, helping to maintain oil prices at around $18/bbl on average from the second quarter 2000 onwards and yielding an average price for 2000 of $18.20/bbl for dated Brent."
In his address to the Houston delegates Naimi reiterated his view that Saudi Arabia is not opposed in principle to investment by foreign companies in the kingdom's exploration and production sector, but that there is no need for such investment as the moment as "we already have plenty of reserves and idle capacity."
Naimi said that Saudi Arabia's oil reserves currently amount to 261 billion bbl, one quarter of the world's total, and that during the last 20 years, while global oil reserves have increased by 400 billion bbl net, Saudi Arabia's contribution to this total has been 25%.
"During the same period," said Naimi, "Saudi Arabia has been able to find 3 bbl of oil for each barrel produced. And in the years to come more oil is more likely to be found in Saudi Arabia than anywhere else in the world.
"Along with the advantages of this enormous oil reserve base, Saudi Arabia's cost of production is one of the lowest in the world. Today, our all-inclusive cost of production is less than $1.50/bbl, while the global average cost is about $5/bbl and in some areas more than $10/bbl.
"We also have a great advantage when it comes to adding new reserves, or increasing production capacity. It costs Saudi Arabia less than 10
Naimi said that, while opportunities to investment in the Saudi E&P sector are not currently available because the country does not need any help with E&P and marketing oil, the kingdom is fully open to investors downstream.
"We need integrated projects," said Naimi, "where each link of the chain adds value. These projects could involve petrochemicals, electricity, water desalination, and so on. The needed investments are those which complement our industries and our national companies, not replace them."
Regarding recent discussions with foreign oil majors over projects in Saudi Arabia, Naimi said: "Many of the proposals which we have received do fit within our needs and within these criteria. We are looking into these proposals carefully, with each receiving close consideration.
"Equally important, we are considering other new ideas and possible projects. We expect soon, therefore, to see the commencement of negotiations with companies to formalize the needed projects. In this regards, I would take this opportunity to make it clear that the concerned companies will have an equal and fair chance."