Genuine oil supply crisis at hand-or just a 'good sweating?'

OPEC continues to shrug off alarms being raised here and there over high oil prices. But the Saudis might just be waiting for a Y2K "surprise" as face-saving cover for a market-moderating move. More about this later.

After falling by about 3% in October from the prior month, oil prices are once again on the rise, climbing by 12% in November. That situation is being propelled by the continuing pull on stocks, with drawdowns averaging 1.1 million b/d in November. It got a further boost when Iraq threw its traditional snit at the close of another 6-month period of oil-for-aid sales, taking its 2.2 million b/d of exports off the markets for 2-3 weeks. Jittery traders became even more nervous when a number of OPEC oil ministers proclaimed that not only would OPEC members refuse to boost production now, but they also would likely extend the production cuts-due to expire at the end of March 2000-into the seasonally slack second quarter. (Conspicuous by its absence from this OPEC market jawboning was Saudi Arabia, which in itself speaks volumes.)

Instead of the quota cheating that so many predicted (not here, however), OPEC solidarity has held fast and even strengthened during November. Adherence to pledged production cuts reached compliance rates estimated at 87-90% in November, up from about 82% in October.

The presumption has been that OPEC simply wanted to see some physical confirmation of the long-speculated drawdown in stocks to a more-manageable level before taking steps to boost production again and thereby moderate oil prices. But the evidence has been at hand for some time now that stocks in fact may soon reach dangerously low levels.

London's Centre for Global Energy Studies notes that the 800,000 b/d US stockdraw in October accelerated to 1.1 million b/d in November-of which 82% was products (see tables below). Much of this has to do with the lousy state of the refining business: Poor margins have shaved refinery runs, reducing supply and thus increasing the call on stocks. The same has held true in Europe, where month-to-month stockdraws were 650,000 b/d and 1.8 million b/d, respectively.

"Continuing heavy December stockdraws in the US and Europe should bring OECD forward stockcover to 50 days' worth on Jan. 1-6 days less than at the start of 1999 and very near minops (minimum operating levels)," CGES said. "Earlier in the year, with OECD stockcover at a comfortable 57 days' worth, the steep price climb was due to a speculative frenzy. Recent price rises have a simpler explanation-a good old scramble for scarce supplies."

CGES notes that the negative effects of higher oil prices are already showing up in oil demand growth. It estimates that the 12-month moving average growth in oil demand in the nine biggest OECD economies has already slowed to 1.1%-and is even negative in Germany, Italy, and the UK.

The London think tank contends that OPEC remains "paralyzed with fear" that he group will repeat the November 1998 mistake of raising oil production quotas just when the demand for OPEC oil was beginning to collapse with the full flowering of the Asian economic crisis.

A 'good sweating'

Paralyzed with fear? Perhaps. Or perhaps OPEC, led by Saudi Arabia, is simply channeling the spirit of John D. Rockefeller-but in reverse. Just as the wily old oil market monopolizer flooded markets to undercut his upstart competitors' attempts at producing more oil ("Gentlemen, the time has come to give them a good sweating."), conversely, the Saudis and their OPEC (and some non-OPEC) cohorts could simply be giving consuming nations a "good sweating" after the debacle of late 1998 and early 1999.

Merrill Lynch estimates that Saudi Arabia needs an oil price equivalent to $20.50/bbl for spot WTI in order to maintain a balanced budget. At last report, the full-year average oil price was still well below that, the $25-27/bbl rally of recent months notwithstanding. Perhaps a yearend surge to almost $30/bbl for a couple of weeks might do that.

While US Energy Sec. Bill Richardson hinted that some unspecified action might be taken by the US government to moderate oil prices he deemed "too high" at $27/bbl, that conflicts with his earlier statements that the US government would not drawn down oil stocks from the Strategic Petroleum Reserve to ease the price spike-but would do so only in the case of an emergency. Earlier this month, Saudi Arabia, Venezuela, and Mexico-those principal architects of the series of OPEC and non-OPEC production cuts that have turned an oil-price collapse into an oil-price boom-jointly announced they would step in to boost their output to offset the shortfall in the event of a Y2K-related supply disruption, which was widely greeted as "statesmanlike."

Is it such a strange scenario to suggest that the expectation of still-higher oil prices and the anticipation of a Y2K-related supply disruption (not likely to be significant, but still carrying an impact in this tight market) might spur an even greater scramble for supplies? Could this then spawn a self-fulfilling prophecy that reduces stockcover to a dangerously low level? And consider that a number of countries (Russia, Nigeria, etc.) have been cited as potential weak links in the supply chain because they have not resolved their Y2K problems. Even a minor, temporary disruption could be magnified into what would be perceived as major supply crisis. And here comes Saudi Arabia (and maybe Venezuela and Mexico, too) to the rescue, perhaps even before the IEA or SPR stocks could be factored in. It is not unreasonable to envision such a scenario (I would consider it smart contingency planning at this stage). And this might allow the Saudis and others in OPEC to tacitly, perhaps surreptitouslym relax their year-long solidarity that has, in fact, delivered to consuming nations a "good sweating."

The upshot? Prices moderate to the low $20s just ahead of the OPEC heads of state meeting in Caracas in March. And then OPEC takes a fresh look at stocks and demand for the second quarter before deciding on another rollover of the cuts.

CGES Outlook

Click here to enlarge image

null

CGES Price Scenarios

Click here to enlarge image

null

OGJ Hotline Market Pulse
Latest Prices as of December 17, 1999

Click here to enlarge image

null

Click here to enlarge image

null

Nymex Unleaded

Click here to enlarge image

null

Nymex heating oil

Click here to enlarge image

null

IPE gas oil

Click here to enlarge image

null

Nymex natural gas

Click here to enlarge image

null

Related Articles

API: US petroleum demand rose in June, second quarter

07/16/2015 Total US petroleum deliveries, a measure of demand, increased 4.2% from June 2014 to average 19.6 million b/d last month. In the second quarter, de...

ConocoPhillips plans further capex reduction for deepwater exploration

07/16/2015 ConocoPhillips reported plans to further reduce its capital expenditures for deepwater exploration, with the “most significant reductions” coming f...

DOE official: LNG exports could be limited by silt-clogged waterways, ports

07/16/2015 Silt, which is increasingly filling US waterways and ports, potentially could limit US LNG exports if it is not dredged soon, a top US Department o...

Fitch notes increase in energy-default rate

07/16/2015 Recent actions of two exploration and production companies have pushed the trailing 12-month energy default rate among issuers of high-yield bonds ...

S-Oil lets contracts for Onsan refinery, olefins projects

07/16/2015 S-Oil Corp., Seoul, has let a series of contracts to Axens to supply technology for a residue upgrading and capacity expansion project at its 669,0...

ENOC trims Turkmen plan in Dragon takeover

07/16/2015 Emirates National Oil Co. Ltd. (ENOC), Dubai, will lower target oil production from the Cheleken area offshore Turkmenistan after acquiring full co...

KMI to buy Shell’s stake in Elba LNG project for $630 million

07/16/2015 Kinder Morgan Inc., Houston, has reached a deal with Royal Dutch Shell PLC to purchase 100% of Shell’s equity interest in Elba Liquefaction Co. LLC...

Genesis to buy Enterprise offshore pipelines

07/16/2015 Genesis Energy LP has agreed to buy the Gulf of Mexico pipelines and services business of Enterprise Products Partners LP for $1.5 billion cash.

Mexican round nets two successful bids

07/16/2015 Two of 14 shallow-water blocks received successful bids on July 15 in Mexico’s historic Round One offering of exploration and production rights (OG...
White Papers

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by
Available Webcasts

On Demand

OGJ's Midyear Forecast 2015

Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


Predictive Analytics in your digital oilfield - Optimize Production Yield and Reduce Operational Costs

Tue, Jul 7, 2015

Putting predictive analytics to work in your oilfield can help you anticipate failures, plan and schedule work in advance, eliminate emergency work and catastrophic failures, and at the same time you can optimize working capital and improve resource utilization.  When you apply analytic capabilities to critical production assets it is possible to reduce non-productive time and increase your yield.

Learn how IBM's analytics capabilities can be applied to critical production assets with the goal of reducing non-productive time, increasing yield and reducing operations costs.

register:WEBCAST


Cognitive Solutions for Upstream Oil and Gas

Fri, Jun 12, 2015

The oil & gas sector is under pressure on all sides. Reserves are limited and it’s becoming increasingly expensive to find and extract new resources. Margins are already being squeezed in an industry where one wrong decision can cost millions. Analyzing data used in energy exploration can save millions of dollars as we develop ways to predict where and how to extract the world’s massive energy reserves.

This session with IBM Subject Matter Experts will discuss how IBM Cognitive Solutions contribute to the oil and gas industry using predictive analytics and cognitive computing, as well as real time streaming for exploration and drilling.

register:WEBCAST


The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.

register:WEBCAST


Emerson Micro Motion Videos

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