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

South Africa’s Enref refinery due maintenance

07/06/2015 Engen Petroleum Ltd. will shut down its 125,000-b/d Enref refinery in Durban, South Africa, for planned maintenance beginning on July 9, the compan...

Woodside lets contracts for Browse LNG project

07/06/2015 Woodside Petroleum Ltd. has let more contracts for the Browse floating LNG project offshore Western Australia. The contracts, awarded to a Technip-...

Emerging producers offered guidelines for governance

07/06/2015 Like most worthy endeavors, governing oil and gas activity at the national level is easier said than done-especially where oil and gas never before...

Nelson-Farrar Quarterly Costimating Indexes for selected equipment items

07/06/2015 The Nelson-Farrar refinery construction index rose to 2,475.6 by December 2012 from 2,467.4 in January of the same year. The index continued to ris...

The price of oil and OPEC-history repeating?

07/06/2015 The world oil market today is characterized by a standoff between the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC producers a...

Oman lets contract for Sohar refinery unit revamp

07/06/2015 Oman Oil Refineries & Petroleum Industries Co., has let a contract to MAN Diesel & Turbo SE, Augsburg, Germany, for work related to the ove...

Gas faces more competition from coal, renewables, IEA official says

07/06/2015 Natural gas faces growing competition from coal and renewable energy sources at a time when its potential demand growth is slowing down, an Interna...

MARKET WATCH: NYMEX oil prices fall on rise in US rig count

07/06/2015 US light, sweet crude oil prices edged down going into the July 4 holiday weekend on the New York market after Baker Hughes Inc. reported July 2 th...

Total unveils development sites for renamed Papua LNG project

07/06/2015 Total SA and its joint venture partners Oil Search Ltd. and InterOil have announced key infrastructure sites for development of the proposed Elk-An...
White Papers

UAS Integration for Infrastructure: More than Just Flying

Oil and gas companies recognize the benefits that the use of drones or unmanned aerial systems (UAS) c...

Solutions to Financial Distress Resulting from a Weak Oil and Gas Price Environment

The oil and gas industry is in the midst of a prolonged worldwide downturn in commodity prices. While ...
Sponsored by

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
Available Webcasts


Operating a Sustainable Oil & Gas Supply Chain in North America

When Wed, Oct 7, 2015

Short lead times and unpredictable conditions in the Oil & Gas industry can create costly challenges in supply chains. By implementing a LEAN culture of continuous improvement you can eliminate waste, increase productivity and gain end-to-end visibility leading to a sustainable and well-oiled supply chain.

Please join us for this webcast sponsored by Ryder System, Inc.

register:WEBCAST


The Resilient Oilfield in the Internet of Things World

When Tue, Sep 22, 2015

As we hear about the hype surrounding the Internet of Things, the oil and gas industry is questioning what is different than what is already being done. What is new?  Using sensors and connecting devices is nothing new to our mode of business and in many ways the industry exemplifies many principles of an industrial internet of things. How does the Internet of Things impact the oil and gas industry?

Prolific instrumentation and automation digitized the industry and has changed the approach to business models calling for a systems led approach.  Resilient Systems have the ability to adapt to changing circumstances while maintaining their central purpose.  A resilient system, such as Maximo, allows an asset intensive organization to leverage connected devices by merging real-time asset information with other critical asset information and using that information to create a more agile organization.  

Join this webcast, sponsored by IBM, to learn how about Internet of Things capabilities and resilient systems are impacting the landscape of the oil and gas industry.

register:WEBCAST



On Demand

Taking the Headache out of Fuel License and Exemption Certificates: How to Ensure Compliance

Tue, Aug 25, 2015

This webinar, brought to you by Avalara, will detail the challenges of tax document management, as well as recommend solutions for fuel suppliers. You will learn:

-    Why it’s critical to track business partner licenses and exemption documents
-    The four key business challenges of ensuring tax compliance through document management
-    Best practice business processes to minimize exposure to tax errors

register:WEBCAST


Driving Growth and Efficiency with Deep Insights into Operational Data

Wed, Aug 19, 2015

Capitalizing on today’s momentum in Oil & Gas requires operational excellence based on a clear view of what your business data is telling you. Which is why nearly half* of oil and gas companies have deployed SAP HANA or have it on their roadmap.

Join SAP and Red Hat to learn more about using data to drive process improvements and identify new opportunities with the SAP HANA platform running on Red Hat Enterprise Linux. This webinar will also show how your choice of infrastructure impacts the performance of core business applications and your ability to achieve data-driven insights quickly and reliably.

*48% use SAP, http://go.sap.com/solution/industry/oil-gas.html

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