Oil markets take on bearish tone amid softening demand, rising non-OPEC output, sagging gasoline prices

Oil markets have suddenly taken on a distinctly bearish tone. As expected, the Organization of Petroleum Exporting Countries took no action at its meeting this week in Vienna. Taken by itself, that would leave the market pretty much in balance for now, as OPEC has repeatedly noted. But some analysts have claimed that the seasonal demand pick-up that begins near the end of the third quarter would set the stage for an oil price spike later in the year or early next year, if OPEC were to do nothing on supply-and especially if Iraqi oil supplies were still being withheld from the market.

What was unexpected was the collapse of the US-UK bid to get "smart sanctions" adopted by the United Nations. This modification to the sanctions regime targeting Iraq would, in theory, loosen constraints on Iraqi imports of goods and services that would benefit Iraqi citizens while tightening the screws on Saddam Hussein's ability to rebuild his arsenal and smuggle oil. It was even the initial, tentative consideration of such a proposal that spawned Baghdad's cutoff of its legal oil exports, covered by the UN Security Council oil-for-aid program in the first place. But the US and UK were blindsided by a threatened Russia veto of the plan, and the proposal was tabled. Russia wants a more-comprehensive sanctions regime that is acceptable to Iraq to be put in place as a prelude to an eventual lifting of all sanctions against Iraq (considering that Iraq's stance never changes-that all sanctions should be lifted immediately-this would be, no doubt, the best possible outcome for Baghdad geopolitically, even if it doesn't nothing to enhance Saddam's financial situation, which would be the case with a continued cutoff of legal Iraqi exports). What happened, instead, was the UN simply agreed to roll over the existing sanctions regime for another 5 months.

At the same time, gasoline prices in the US-the other primary driver in oil markets of late-continue to fall. That's certainly counterintuitive at a the peak of the summer driving season, but it can be explained by the frantic scrambling by US refiners to make or import enough gasoline to meet the seasonal surge in demand. The brimming stocks situation has sliced about a quarter from wholesale gasoline prices in the past couple of months, and that has helped take some of the heat off crude oil prices.

Now OPEC is starting to talk about considering an emergency meeting-ahead of its next regularly scheduled ministerial meeting, on Sept. 26, should the resumption of Iraqi oil exports undermine prices to the point where the OPEC basket marker price falls below the bottom of the group's official $22-28/bbl target price band.

That's pretty much in line with what the Canadian Energy Research Institute is projecting. The Calgary think tank contends that much of the strength in oil markets lately has emanated from concerns over US gasoline stocks earlier in the quarter and over Iraq's potential mischief. With these two elements largely neutralized, that suggests oil prices will continue to slide in the months ahead, and OPEC will be forced to consider production quota cuts again soon, perhaps early in 2002.

"The consensus view for the past several months has been that OPEC will have to increase quotas in the third or fourth quarter this year, to keep a lid on oil prices in the face of seasonal demand," CERI said. The analyst holds to its view that relatively weak world oil demand growth, stemming from the slowdown in the world economy, and solid non-OPEC supply growth will alleviate the need for an OPEC quota increase later this year.

"CERI continues to expect that OPEC in fact will have to cut its quotas early in 2002 to keep crude prices above its target floor (about $24/bbl for WTI)," the analyst said. "Even if quotas are cut, forward demand cover could jump to 56 days in first quarter 2002, compared to our estimate of an average 55 days over the last 3 quarters of 2001."

CERI also dismisses the notion that a shortfall of heating oil stocks in the winter will cause another spike in oil prices. That scenario evolved from the similar concerns over gasoline stocks, which have since evaporated. The analyst contends that the same self-fulfilling prophecy will come about with heating oil: "Ample crude stocks will keep a lid on product prices. Any fear of shortages will push heating oil prices up relative to crude and increase refining margins, which in turn will encourage higher crude runs, build heating oil stocks, and alleviate the fear of shortage."

If supply and demand are roughly in balance, then, it follows that oil prices probably will stay relatively flat until further signs of that weakened demand materialize. Ensuing softness in oil prices will encourage OPEC to trim output again. Remember, though, that the oil-for-aid program comes up for renewal in December-exactly the same time of year that Iraq pulled its oil off the market in 2000. And the rest of OPEC (mainly Saudi Arabia) stepped in to take up the slack, keeping oil prices from going through the roof at a period of peak demand.

The betting here is that Iraq will stir up trouble again as the program renewal deadline approaches. The US and UK certainly will revive their smart-sanctions proposal, and warming relations between presidents Bush and Putin suggest that it may make more headway the next time around. And North Sea output always falls in the summer and comes roaring back in the fall; the same thing happens on Alaska's North Slope. So a very possible scenario is one of OPEC cutting output in September (if not sooner) amid a weakening demand outlook and rising non-OPEC supply, then restoring those cuts in December. And despite the rollercoaster ride, the average price of oil over the year probably will remain pretty much where it is now.

How long the Saudis want to keep this up (and in the final analysis, that's what this all about, anyway) depends to a large extent how much market share it loses to non-OPEC nations. Its fellow members are not really that much of concern, given the swing-supply leverage the oil giant has and the limited capacity growth potential for other OPEC members. But the Caspian, Russia, Angola, Sudan, et al., are contributing to what shapes up as the biggest year-to-year non-OPEC supply jump in years. More on that subject next week.

OGJ Hotline Market Pulse
Latest Prices as of July 6, 2001

null

NOTE: DATES FOR IPE BRENT AND GAS OIL ACTUALLY REFLECT THE LATEST 5 DAYS OF TRADING (June 29-July 5), NOT ACTUALLY BROKEN BY THE JULY 4 HOLIDAY AS THE DATE AXIS INDICATES.

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

NOTE: Because of holidays, lack of data availability, or rescheduling of chart publication, prices shown may not always reflect the immediate preceding 5 days.

*Futures price, next month delivery. #Spot price.

Related Articles

Shell cuts $15 billion in spending for 2015-17

01/30/2015 Royal Dutch Shell PLC has curtailed more than $15 billion in potential spending over the next 3 years, but is not “not overreacting to current low ...

Chevron’s $35 billion capital budget down 13% from last year

01/30/2015 Chevron Corp. will allocate $35 billion in its capital and exploratory investment program for 2015, including $4 billion of planned expenditures by...

Oxy cuts capital budget by a third

01/30/2015 In the midst of falling oil prices, Occidental Petroleum Corp., Houston, expects to reduce its total capital spending for 2015 to $5.8 billion from...

MARKET WATCH: NYMEX natural gas prices drop after storage report

01/30/2015 US natural gas closed at its lowest price in more than 2 years on the New York market Jan. 29 following the government’s weekly gas storage report,...

PwC: Low oil prices might drive surge in restructuring in 2015

01/29/2015 Mergers and acquisitions (M&A) in the oil and gas industry hit 10-year highs in terms of deal value and volume in 2014, according to a report f...

DOE could meet 45-day LNG export decision deadline, Senate panel told

01/29/2015 The US Department of Energy would have no trouble meeting a 45-day deadline to reach a national interest determination for proposed LNG export faci...

API forms Colorado Petroleum Council, picks executive director

01/29/2015 The American Petroleum Institute has opened a Denver office that will focus on oil and gas priorities in Colorado. Tracee Bentley, who previously w...

ASMP report lists routes to shale-stimulated manufacturing rebound

01/29/2015 The US shale oil and gas renaissance has created a manufacturing rebound that could produce even more jobs and stimulate further economy growth wit...

ConocoPhillips revises down $2 billion from budget

01/29/2015 ConocoPhillips has shed an additional $2 billion from its capital expenditures for 2015, decreasing total spending to $11.5 billion from the previo...
White Papers

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

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...
Available Webcasts


Prevention, Detection and Mitigation of pipeline leaks in the modern world

When Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 

register:WEBCAST



On Demand

Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


The Future of US Refining

Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

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