Oil markets are turning into quite the menagerie these days, what with all the bears and bulls running into each other.
We have the unprecedented circumstance of an imminent outbreak of war that could involve extensive damage to oil facilities in several key oil exporting countries in the Persian Gulf occurring simultaneously with the loss of major supply elsewhere (Venezuela). Nevertheless, some of the bears are starting to stir from their winter hibernation. Part of the bears' concern is near-term and centers on Venezuela. As the general strike winds down in that country and oil production ramps back up, some within the Organization of Petroleum Exporting Countries claim that the Venezuelan increase combined with the recent surge in OPEC output could warrant another production cut. The other bearish concern is longer-term and centers on postwar Iraq. The thinking in this case is that a post-Saddam Iraq would be anxious to rebuild production quickly, thus testing OPEC cohesion.
Venezuelan outlook
Venezuela's oil production certainly has rebounded from the 200,000 b/d or so in December. While the administration of President Hugo Chávez and the striking oil executives remain far apart in their estimates of current production, at least they agree on the trend: up since December, to 1.3 million b/d or 1.9 million b/d, depending upon whom one believes.
But that is a far cry from the prestrike level of 3 million b/d, not to mention the lack of progress in reviving Venezuela refined products exports.
Aaron Brady, senior analyst with Boston-based Energy Security Analysis Inc., doubts that Venezuela will get anywhere near its prestrike levels, which suggests that US oil imports will continue to lag unless Persian Gulf output remains high.
While Venezuela has restored a sizeable chunk of production, reliable sources in that country tell Market Hotline that what's been restored is "low-hanging fruit." In fact, these sources tell us, the scramble by nonqualified personnel to restore production in Venezuela may have resulted in enough reservoir damage to have lost permanently 400,000 b/d of production and 1-2 billion bbl of oil reserves.
With Chávez continuing to gut the once-dynamic state oil company Petroleos de Venezuela SA as he consolidates his tenuous grip on power, the likelihood of getting back anywhere close to 3 million b/d within the foreseeable future diminishes with each passing month.
Iraq
While every scenario involving Iraq envisions a disruption in that country's oil exports, the big questions remain: For how long, and will the outage spread elsewhere in the Persian Gulf?
Analysts at Edinburgh-based Wood Mackenzie think that Iraqi oil "will return quickly to the market and in rapidly increasing volumes." They contend that this situation will be the "crucial challenge for oil market-makers in the coming decade."
Of course, "quickly" is a relative term. WoodMac reckons that Iraqi productive capacity of 3.5 million b/d is likely to be restored by 2005-06, and 6 million b/d is a decade away. "While any short-term spike in oil prices is a threat to recovery in the fragile global economy, it is likely that oil prices will be back to 'normal' within 6 months," WoodMac said. "The challenge then will be OPEC's abilitiy to manage the forecast expansion of Iraqi supply and to balance the market. This will become increasingly difficult, given the current renaissance in Russian and other ex-Soviet production. All of this points to the prospect of oversupply and lower prices, rather than the shortages and higher prices that dominate current market concerns."
Interim concerns
In the meantime, though, there are strategic stocks to cover further outages. The International Energy Agency controls enough stocks among its member nations to cover 114 days of total oil imports by its members—as much as 12 million b/d in the first month. Plus, there is a lot more Saudi oil in floating storage than there was a couple of months ago. IEA officials avow their readiness to act today, in marked contrast with the group's "day-late, dollar-short" response of 2 million b/d released days after the onset of Desert Storm in 1991.
Recall that oil prices had their biggest 1-day drop in history when Desert Storm was launched. Anyone want to bet against this record getting broken with Desert Storm redux?
(Online Feb. 7, 2003; author's e-mail: [email protected])