If oil production growth outside the Organization of Petroleum Exporting Countries continues apace, then members of the organization will be forced to curtail output this year in order to avert a supply glut—that is, if the International Energy Agency's demand projections are on target.
At its Sept. 24, 2003 meeting, OPEC reviewed its January and April 2003 decisions to adjust its production ceiling to compensate for supply disruptions from the war in Iraq. And noting the gradual return of Iraqi production to the market last year, the organization set its current output level of 24.5 million b/d effective Nov. 1, 2003. This is down from the previous target of 25.4 million b/d. Following its December meeting, the organization announced that it had assessed the market for the first half of 2004 and would leave its agreed production level unchanged for the near term.
Also in this announcement OPEC said, "taking into consideration the market outlook for 2004, in particular the second quarter, when the projected significant supply overhang is expected to exert considerable pressure on oil prices, a situation requiring continuous monitoring and close assessment, the conference reaffirmed its firm determination to take any measures, when deemed necessary, to maintain market stability and avoid price fluctuations."
Indeed, Iraqi production—which is not considered in OPEC's production targets—has grown to 2 million b/d. And expectations are that production there will reach 3 million b/d late this year.
OPEC has not recently adhered to its policy of reviewing output whenever its basket price for crude exceeds $28/bbl for more than 20 trading days and will not meet until its regularly scheduled meeting next month.
In fact, the OPEC reference basket price of oil averaged $28.06/bbl last year. The average price was $28.31/bbl in October, $28.44/bbl in November, and $29.41/bbl last month. Although prices are currently high, OGJ reckons that at its next meeting, OPEC must lower its output ceiling to keep the market balanced in 2004.
Demand growth
The global economic recovery is driving expected demand this year (see relted story, p. 35). IEA predicts that 2004 oil demand growth will be 1.2 million b/d.
The agency expects North American oil demand to grow to 24.84 million b/d this year from 24.55 million b/d. US demand will increase 300,000 b/d to 20.31 million b/d, while Mexican demand is unchanged at 2.05 million b/d, and Canadian demand dips 100,000 b/d to 2.14 million b/d.
Oil demand in Asian countries of the Organization for Economic Cooperation and Development will decline this year. IEA pegs 2004 demand in these countries at 8.57 million b/d, down from 8.69 million b/d last year.
The largest change in demand will be in China, where IEA forecasts that this year's oil demand will grow 320,000 b/d to 5.75 million b/d. Aggressive government infrastructure programs, increased consumer spending, and robust export demand are driving China's economic growth, IEA said, but the agency warned that infrastructure limitations and rising prices could temper that country's demand growth this year.
Demand in other Asian countries outside the OECD will grow 190,000 b/d to 7.98 million b/d, and demand in the Middle East will grow by the same amount to 5.34 million b/d.
Supply
Non-OPEC supply growth and an increase in OPEC NGL and nonconventional oil output are also pressuring OPEC's crude output ceiling.
Increases in Russian production will drive oil output in the former Soviet Union to 11.1 million b/d from 10.3 million b/d last year, as IEA expects Russia's export capacity to grow 600,000-700,000 b/d this year.
The Paris-based organization also expects production growth in North America, Latin America, and Africa. Total non-OPEC supply will average 50.5 million b/d this year, up from 49 million b/d last year.
More oil demand will be met by NGLs and nonconventional oil this year, further reducing the need for OPEC's conventional oil. IEA estimates place 2004 average supply of OPEC NGL at 4.1 million b/d. The agency expects that OPEC's output of NGL, condensate, and nonconventional oil will increase an average 434,000 b/d this year.
Explaining the surge, IEA said that Iran accounts for 61,000 b/d of the year-on-year increase via Phase 1 of the South Pars project and two new NGL plants, both activated last year. Saudi Arabia sees a 60,000 b/d increase from higher condensate volumes and the late-2003 expansion of the Berri NGL plant. Qatar contributes a 45,000 b/d increase with the impact of full production from the NGL-4 plant at Messaieed.
Additionally, in Venezuela and Nigeria, 2004 NGL and condensate output combined will be 80,000 b/d higher than a year ago. This is largely due to an assumed absence of the outages seen in the first half of 2003—the Venezuelan workers' strike and Nigeria's Oso condensate fire.
Venezuela also sees a 125,000 b/d increase in synthetic crude production, which IEA classifies separately from conventional crude. The start-up of the Hamaca heavy-oil upgrader in the second half of this year will account for additional supply.
In Algeria, noncrude liquids supply should increase 40,000 b/d with the growth of LPG and condensate supply from Ohanet field.
Call for OPEC crude
With these increases in sight, OGJ predicts that at its Feb. 10 meeting, OPEC will lower its output ceiling such that, including Iraq, the organization's output will average 26.5 million b/d in the first quarter of this year.
The call on OPEC crude is further eroded in the second quarter as demand subsides seasonally. OGJ forecasts that OPEC must lower output to average 25.5 million b/d during the second quarter to avoid a supply glut. While this may seem low, the organization's output target was just 21.7 million b/d excluding Iraq throughout 2002. If supply of crude from OPEC declines to this level, then OECD stocks will still realize a 2.4 million b/d build for the quarter.
If the organization is to hold output in check to avoid oversupplying the market this year, then it must exercise considerable restraint in light of healthy oil prices. If OPEC's output remains at 25.5 million b/d for the rest of the year, then the average stockbuild for 2004 will be 800,000 b/d, provided that demand stays in line with IEA estimates.
