BIGGEST OIL SPILL TACKLED IN GULF AMID WAR, SOFT MARKET

Feb. 4, 1991
Industry is scrambling to cope with history's biggest oil spill against the backdrop of a Persian Gulf war and a softening oil market. U.S. and Saudi Arabian officials accused Iraq of unleashing an oil spill of about 11 million bbl into the Persian Gulf off Kuwait last week by releasing crude from the giant Sea Island tanker loading terminal at Mina al Ahmadi.

Industry is scrambling to cope with history's biggest oil spill against the backdrop of a Persian Gulf war and a softening oil market.

U.S. and Saudi Arabian officials accused Iraq of unleashing an oil spill of about 11 million bbl into the Persian Gulf off Kuwait last week by releasing crude from the giant Sea Island tanker loading terminal at Mina al Ahmadi.

Smart bombs delivered by U.S. aircraft hit two onshore tank farm manifold stations, cutting off the terminal's source of oil flow Jan. 26. A small volume of oil was still leaking from 13 mile feeder pipelines to the terminal at presstime.

Press reports quoted U.S. military and Saudi officials as estimating the slick at 35 miles long and 10 miles wide but breaking up in some areas late last week.

Meantime, Iraq reportedly opened the valves at its Mina al Bakr marine terminal at Fao to spill crude into the northern gulf (see map, OGJ, Jan. 28, p. 21), British television reported late last week. BBC reported significant volumes of crude in the water off Fao 24 hr after the terminal valves were opened.

Mina al Bakr is a considerably smaller terminal than Sea Island, suggesting that the resulting flow of oil would be smaller than that at Sea Island.

The Fao terminal can handle vessels as large as 270,000 dwt. Sea Island, which has three loading points, can handle tankers of more than 500,000 dwt.

An earlier, lesser spill may have been unleashed after Iraqi artillery shelled the tank farm at the 30,000 b/d Ras al Khafji refinery in the Saudi sector of the Neutral Zone shared with Kuwait. Saudi officials reported crude contaminating beaches around Khafji, indicating the tank farm as the likely source of that crude spill.

Saudi officials are lining up oil spill containment and cleanup equipment and may attempt on water bioremediation using microbial agents developed by a U.S. firm and used in successful tests in Gulf of Mexico and Offshore Alaska spills.

OTHER MARKET DEVELOPMENTS

Meantime, security measures are being stepped up at oil facilities and offices with the continuing threat of terrorist attacks.

The first such attack came with a rocket attack on British Petroleum Co. plc offices in Athens.

Developing nations continue efforts to reduce oil consumption and line up buffer supplies as the Persian Gulf war rages into its third week.

The International Energy Agency will continue to implement its emergency response contingency plan to make 2.5 million b/d of oil available to the market despite industry criticism that the move will contribute to an oil glut and depress prices.

The U.S. made its first commercial sale of crude drawn from the Strategic Petroleum Reserve on the Gulf Coast, selling less than it expected.

Some U.S. refiner/marketers continued to maintain caps on products prices-earlier implemented as freezes in anticipation of a big runup in oil prices upon the outbreak of war.

Some refiners rolled back wholesale prices.

Industry analysts are devising new scenarios for oil markets in 1991, depending upon the war's outcome and other market developments. In general, the outlook is bearish-certainly much more so than most had projected a few months ago.

SPILL STATUS

Saudi Arabia chartered the Norwegian owned Al Waasit cleanup vessel in an effort to contain the southward progress of the Persian Gulf oil slick.

The vessel, with substantial oil boom capacity, has been deployed to protect the water desalination plant at Jubail. The vessel was reported to have laid out booms, and the Saudis have several large vessels standing by to collect recovered oil.

Saudi Arabian Oil Co. has built up sizable stocks of booms and skimmers and other equipment, along with the ships and personnel needed to deploy them. The oil spill equipment buildup started during the Iran-Iraq war when an Iraqi attack on an Iranian offshore platform resulted in oil spilling into the gulf for more than a year.

Although not disgorged at the high rates seen from the Kuwaiti terminal, the Iranian platform oil also posed a threat to Saudi Aramco's refining and exporting facilities and to desalination plants in the northern gulf.

Particular emphasis has been placed on ensuring the slick does not move ashore at the industrial city of Jubail, which has refining and desalination plants and a deep canal that moves seawater around the city for use as cooling water in petrochemical and other industrial plants built during the last 10 years.

The Jubail desalination plant, the world's largest, and its associated electrical power production are essential to Saudi Arabia's industrial infrastructure. Part of the desalinated water is piped to Riyadh where it is mixed with fresh water from deep wells.

At this time of year Saudi utilities are under less pressure than in the spring, when the air conditioning load increases.

Abdul-Aziz al Hokail, a senior vice-president at Saudi Aramco, said Saudi Arabia is well protected, but it might need some outside help in dealing with the environmental damage.

OIL SPILL EQUIPMENT EN ROUTE

Last year Saudi Aramco joined the Oil Spill Service Center (OSSC) at Southampton, England, which keeps substantial reserves of booms, skimmers, and other cleanup equipment. At Aramco's request, the center has shipped via air freight more than 90 tons of equipment to Saudi Arabia.

The center is owned by 13 international oil companies and can make antipollution experts available, although there has been no request for any personnel.

The OSSC package contains heavy duty ocean booms specially designed to prevent spills reaching inland areas, inshore booms, skimmer booms, four weir skimmers for heavy oil, and four vacuum units for beach cleanup. All booms and skimmers come with equipment for rapid deployment from supply boats.

Norway's state pollution authority has offered to supply 2,000 m of containment booms and three skimmers, along with a number of Norwegian antipollution specialists. The equipment is kept on pallets and can be mobilized quickly if needed.

Spill specialists say equipment available from Europe is well suited to handle Kuwaiti crude in the relatively calm waters of the Persian Gulf. They also point out the rate at which crude is evaporating in the gulf spill is much faster than seen in European incidents or with the Exxon Valdez off Alaska.

SPILL'S SCOPE

The exact size of the slick is uncertain because there is no accurate estimate of how long Iraq had been discharging oil into the gulf from the Sea Island terminal before the slick was spotted by allied forces arrayed against Iraq.

Saudi Arabian Oil Minister Hisham Nazer said at its height the slick was 30 miles long and contained about 11 million bbl of oil.

Industry sources in Europe agree that the gulf spill is the biggest ever seen, and some contend it has the potential to damage the environment to a greater degree than any previous spill.

Previously, the largest oil spill on record occurred during June 1979-March 1980, when a well blowout on Mexico's 1 Ixtoc platform dumped 3.3 million bbl of crude into the Gulf of Mexico.

European sources also say the fire sparked by allied aircraft fire in an attempt to burn off some of the crude had gone out after burning relatively small volumes of oil.

Another concern is that the spill last week was starting to break up into smaller slicks, each of which will have to be tracked and contained.

Allied air supremacy is vital in keeping the spill cleanup operating around the clock. Allied naval forces also are taking precautions to ensure Iraq's small fleet of high speed patrol boats are not allowed into the cleanup area.

SPILL THREAT

The oil spill at presstime was spreading into the central part of the gulf, headed for a number of islands that are the breeding ground for turtles.

In addition to the Saudi desalination plants, similar units in Bahrain and Qatar are threatened.

If the slick spreads farther south there is a serious threat to the environmentally sensitive salt marshes along the coast of the United Arab Emirates.

Iran also is concerned about the effect of the slick on its offshore operations. The head of lran's environmental protection agency, Hadi Manafi, said parts of the slick were moving into Iranian waters.

He said Iran was not able to handle the spill without help from outside agencies. He added the oil has caused massive environmental damage in the northern part of the gulf that is continuing daily.

SPILL RESPONSE

While awaiting a contract with Saudi Arabia, officials of Alpha Environmental Inc., Austin, Tex., said they were laying defensive and remedial plans to deal with the Mina al Ahmadi oil spill.

Alpha officials plan to apply several tons of Alpha BioSea material stored in Austin in defensive deployments at selected, sensitive areas-fisheries, reefs, estuaries, and wetlands-to be designated by the Saudi government.

For longer term remedial applications, Alpha would establish a manufacturing plant in Saudi Arabia.

Alpha officials hoped to have men, materials, and equipment on scene by mid February, before the spill travels the length of the Saudi coast.

"Otherwise, al Jubail will be a cleanup site, rather than a defense site," said Franz Hiebert, Alpha director of geoscience programs.

At last report, the oil from Mina al Ahmadi was moving at a rate of about 15 miles/day.

The method of applying microbes in the Persian Gulf, whether by boat or aircraft, has not been decided.

CLEANUP CONCERNS

Hiebert said temperatures and marine environment in the Persian Gulf are similar to that in the Gulf of Mexico, where Alpha Environmental last year had success using microbes to battle an oil spill from the disabled Mega Borg tanker (OGJ, June 18, 1990, p. 13).

"But some physical Parameters are going to be different-undoubtedly, the shoreline and marsh areas will be unique to the Persian Gulf," Hiebert said.

Another key difference is the amount of oil spilled.

A large slick of oil, unbroken at surface with patches of water, would diminish the effectiveness of Alpha's oil eating microbes, Hiebert said.

"Microbes just can't work on bulk oil. If there were an immense, thick blanket of oil, we would somehow have to alter that condition."

Alpha Environmental was basing its plans on the presumption it would be dealing with an open water spill by the time its crews arrived.

SECURITY MEASURES

Elsewhere, Venezuela's government has stepped up military and police protection at key oil industry facilities in the country in anticipation of possible terrorist actions related to the Persian Gulf war.

The first moves occurred before arrival of the United Nations Jan. 15 deadline for Iraq's withdrawal from Kuwait. State owned Petroleos de Venezuela SA is a linchpin in Venezuela's economy, providing the country with most of its income. Venezuela has supported U.N resolutions calling for Iraq's withdrawal from Kuwait and is second only to Saudi Arabia in the amount of increased oil production in response to the loss of Iraqi and Kuwaiti supplies stemming from the U.N. embargo on those countries.

The headquarters of BP's small marketing operation in Greece was hit by a terrorist attack Jan. 29.

The building in northern Athens was hit by a rocket fired from a mobile antitank missile launcher. BP said the rocket apparently was aimed at a second floor window but missed and hit the concrete shell of the building. Glass was shattered and concrete and glass fragments caused minor damage.

The attack took place at night, when the building was occupied only by security staff, none of whom was injured. Operations were back to normal quickly the following day after cleanup.

MARKET UPDATE

Industry sources say liftings from Saudi terminals have started to increase again, and production is moving back to 8 million b/d.

Saudi sources said last month's cut in production from Safaniya offshore field, adjoining the Saudi border with the Neutral Zone, were not connected with the military threat from Iraqi forces in occupied Kuwait.

Demand for the field's heavy crude had declined and production trimmed in line with market demand, they said.

Meantime, confidence is returning to the tanker industry, reflecting the high level of security allied defenses appear to offer shipping in the northern gulf.

Lack of casualties among all types of shipping have spurred a 50% cut in war risk insurance rates.

Japanese owners, who have taken the most cautious attitude to trading in the gulf, also have relaxed restrictions on tankers visiting the Umm Said onshore marine terminal in Qatar, although their ban on liftings from Ras Tanura and Juaymah continues.

The London shipping newspaper Lloyds List reported Saudi Arabia has started chartering tankers for use in a shuttle service between Ras Tanura and Oman. It said the London shipping market was reporting Saudi interest in two ultralarge crude carriers for shuttle work.

IMPORTING NATIONS RESPOND

Oil importing nations are taking steps to ensure adequate supplies despite the apparent surplus of crude on the market.

India has signed contracts covering almost all the country's crude and products needs for the rest of the fiscal year ending Mar. 31.

Additional required supplies are estimated at only about 1.46 million bbl of crude and 2.19 million bbl of products, which India expects to buy on the spot market.

India has slowed liftings from Persian Gulf countries because its stocks are so high now there currently is inadequate storage for contract volumes.

Shipping Corp. of India tankers are en route to Iran to lift 3.65 million bbl of Iranian crude, and planned supply deals with the U.S.S.R. and Malaysia are proceeding as planned. India also is negotiating to buy 7.3 million bbl of crude from BP on 180 days' credit as part of its effort to build a buffer as the Persian Gulf war continues.

After initial reluctance, BP has asked for a guarantee by a bank, preferably British.

South Korea will increase crude oil imports by 30% this year to 1.06 million b/d. An energy ministry official said higher imports were needed to meet expanded domestic refining capacity and continuing strong economic growth.

Meantime, Japanese refiners have heeded advice from the Petroleum Association of Japan and the Japanese Ministry of International Trade and Industry not to push up crude oil prices by rushing into emergency spot purchases.

In 1973 and 1979 the activities of Japanese refiners in the markets contributed significantly to crude price spikes. An association official said Japanese refiners had learned the lessons of the last two oil shocks.

IEA ACTIONS

IEA Governing Board Chairman Geoffrey Chipperfield said he did not know whether the market would need the extra 2.5 million b/d, but it could be immediately drawn down if required.

After a governing board meeting in Paris, IEA Executive Director Helga Steeg said so far there had been no drawdown of strategic stocks in Organization for Economic Cooperation and Development countries.

The agency was trying to reduce supply/demand uncertainty, she said.

The 2.5 million b/d provides a "fairly large cushion," but amounts could be extended if necessary, Steeg noted. IEA's action in practice has moved large volumes of oil from a category where they were not available to the market to a category where they can now be drawn down, she pointed out.

Chipperfield said the 2.5 million b/d gives a signal of confidence to the market, which is now assured that governments are ready to increase supplies if needed.

He said 21 IEA member countries as well as associates France, Finland, and Iceland had taken all necessary measures to put the 2.5 million b/d on the market as soon as needed.

Four-fifths will come from stock draw, the remainder from demand restraint. Countries such as the U.S., Germany, and Japan will draw only on stocks, while others will use a mix of stock draw and demand restraint and still others will use only demand restraint.

OPEC BLASTS IEA

Chipperfield refused to comment on a strong attack from Sadek Boussena, Algeria's oil minister and president of the Organization of Petroleum Exporting Countries.

In an interview with the official Algerian news agency, Boussena protested IEA's decision to put 2.5 million b/d on the market when there is no shortage of supplies.

He accused IEA of engineering a fall in world oil prices.

"This would have a disastrous effect on the economic growth and social stability of countries strongly dependent on their oil resources," Boussena said.

The governing board meeting noted world oil markets are still amply supplied. OPEC crude production for January was tentatively estimated at 23 million b/d, down from the 23.5 million b/d in December. The market also is helped by a lack of products supply tightness the agency had forecast.

Surplus refining capacity continues in the OECD, mainly in Europe and the U.S.

U.S. refinery utilization has been less than 85%. In Europe, refinery throughput remained below the 1988-89 levels with surplus capacity currently available.

In Japan, however, there is little spare refining capacity.

SPR SALES

The U.S. Department of Energy will sell only 17.3 million bbl of oil from the SPR, in a drawdown prompted by the war's outbreak.

DOE had offered to sell 33.75 million bbl (OGJ, Jan. 21, p. 20) from the 585 million bbl SPR, about one third of it sweet crude and two thirds sour. But industry bid for twice as much sweet as it did for sour and offered less for the sour than DOE expected. DOE chose to sell more sweet and much less sour than originally offered. In its sale notice, DOE had said it might change the sale mix after reviewing bids.

The 13 companies that are the apparent high bidders offered to buy 14.35 million bbl of sweet crude and 2.95 million bbl of sour. Both crude types are light.

DOE said if the SPR oil were delivered under current market conditions, the average sale price would be about $20/bbl. Prices will be adjusted upon delivery to reflect market changes.

The drawdown will be from four of the six SPR sites: Bryan Mound near Texas City, Tex., West Hackberry near Lake Charles, La., Bayou Choctaw near Baton Rouge, and Weeks Island near New Orleans.

SPR SALES CUT

Explaining why the sale was reduced, Energy Sec. James Watkins said, "We clearly must remain sensitive to the market by making available the crude oil the industry is saying it really needs and not allowing bargain hunters to take advantage of the taxpayers, while at the same time fulfilling our commitment to the IEA's energy response plan.

"To balance these objectives, I determined that the best approach would be to select only those bids that were above 97.5% of benchmark prices of comparable crude."

Using the 97.5% threshold means the sale will yield 99% of DOE's benchmark value for the crude and ensure the sale prices will be at market rather than bargain prices, he said.

"This decision is fully consistent with our IEA commitment and with the announced SPR sales procedure. The sale has worked well, and we are on schedule."

Watkins said the smaller sale does not reflect a reduction in the U.S.'s commitment to support the IEA plan to make more oil available as a hedge against supply disruptions caused by the war in the Middle East.

"At this past Monday's meeting, the IEA governing board prudently affirmed the flexibility that member countries should have in sharpening their energy response actions to respond to market conditions," Watkins said.

"We have used that flexibility to ensure that our sale reflects genuine market needs while at the same time satisfying crude oil buyers that the government is a reliable supplier at fair market prices.

"We have been in close consultation with our international allies at each step of this process, and we will continue to work with them until the Middle East conflict is resolved and stability is returned to world oil markets."

DOE will begin awarding contracts and arranging delivery schedules after bidders have submitted their payment and performance guarantees.

Watkins said, "We will be ready to move oil out of the SPR beginning next week if any of the bidders can arrange for early transportation. However, because U.S. industry normally schedules oil shipments near the end of each month for the next 30 days, it is likely that most of the crude oil will be delivered in late February and throughout March."

REFINER/MARKETER ACTIONS

Most U.S. products price freezes announced Jan. 1617 by refiners/marketers became ceilings when the price of crude unexpectedly plunged after early reports of astonishing allied military successes. Since the outbreak of war, many refiner/marketers have dropped wholesale products prices sharply, although retail prices overall have lagged somewhat.

A lower price at the pump will help mitigate some of the public relations damage oil companies face as they report sharply higher fourth quarter profits amid war in the Persian Gulf (see story, p. 17, and Watching Washington, p. 23).

Chevron Corp. noted its underrecovery of higher crude costs in products prices was reflected in its third quarter 1990 profits, which were down 21% from third quarter 1989 and 45% from second quarter 1990.

Chevron said its dealer prices at yearend 1990 were lower in some areas of the country than they were Aug. 2, the day Iraq invaded Kuwait, even though crude costs were higher.

"As of Dec. 31, Chevron's price to its dealers, excluding taxes, for regular unleaded gasoline in Los Angeles was 79/gal, 1 less than it was Aug. 2," the company said.

"On that same day, West Texas intermediate ... closed at 68/gal, 13 more than on Aug. 2."

The U.S. average price of self-serve regular unleaded gasoline dropped to its lowest point since the first week of August 1990, shortly after Iraq invaded Kuwait, the American Automobile Association reported.

A survey conducted for AAA by Computer Petroleum Corp., St. Paul, Minn., showed the average price of self-serve regular unleaded fell 2.4 on the week to $1.225/gal, the lowest since $1.201 Aug. 7, 1990.

Self-serve midgrade unleaded fell 2.2 to $1.306/gal, and self-serve premium unleaded dropped 2.3 to $1.395/gal. Amoco Corp. lifted its freeze on wholesale gasoline and posted jet fuel and distillate prices, and ARCO discontinued its ceiling on gasoline, diesel, and jet fuel prices Jan. 23.

Chevron discontinued its freeze on pump prices at company owned stations Jan. 23, and its wholesale price caps for branded products became moot when it cut gasoline and diesel prices.

Mobil Corp. lifted its petroleum products price freeze and its ratable lifting program for gasoline and heating oil. Since lifting its freeze on light products prices Jan. 25, Shell Oil Co. has trimmed those prices by an average 6%.

Texaco Inc. continues its cap on branded wholesale products but has cut those prices by about 2-5/gal since hostilities began.

Unocal Corp. has retained its price ceiling on all product prices in the U.S. West and Southeast and at all U.S. truck stops. Since Jan. 16, however, Unocal has reduced its wholesale gasoline prices on the West Coast by a total of about 11/gal.

BP America Inc. continues to limit supplies to 50% of January 1990 allocations on the West Coast only. Also, Marathon Oil Co. continues to allocate 100% of contract monthly limits and 150% of daily limits for branded products and 150% of daily limits for other wholesale products.

Phillips Petroleum Co. lifted its motor fuels and distillates allocation system, but its wholesale management surcharge remained 25/gal as of presstime. That charge was increased from 10/gal Jan. 14.

Sun Co. Inc. kept intact its ceiling on Sunoco and Atlantic gasoline prices to all classes of customers but has continued to reduce branded and unbranded product prices.

WAR SCENARIOS

Analysts are rushing to devise new market outlook scenarios amid the rubble of shattered forecasts of $50/bbl oil prices with the outbreak of a Persian Gulf war.

Some energy analysts are venturing into military strategy scenarios.

Charles Maxwell, senior energy analyst for C.J. Lawrence Inc., New York, sees three scenarios for the war, each of which results in Iraq losing and meeting all U.N. conditions for peace with or without Saddam Hussein in power:

  • The Iraqi army in Kuwait surrenders after weeks of intensive bombing and shelling and being cut off from communications and supplies, or a new Arab peace initiative is seized upon by Hussein to cover voluntary withdrawal of his armies from Kuwait. Maxwell gives this scenario, covering 4-6 weeks, a 20% chance of occurring.

  • After 3-4 weeks of bombardment from air and sea, allied forces break through lraq's battered Kuwaiti border fortifications and succeed in overrunning Kuwait within a week with less than 5,000 casualties. Hussein might or might not be replaced, but either way he would salvage little military strength or prestige with which to hold the country in the long term. Odds are 40%.

  • After a long bombardment, allied ground forces break through the Saudi-Iraqi border well to the west of Kuwait without engaging the main Iraqi forces, move up through Iraq toward Basra, then cut through to the sea to complete an encirclement of Kuwait. Allied forces then would slowly press the Iraqi army into a gradually smaller area with harrying attacks but no major assault on entrenched positions. That would pressure the Iraqis to eventually surrender or launch a desperation attack, which they would lose. Odds for this low casualty scenario, expected to take 8-12 weeks, are 40%.

The latter two scenarios could become intertwined.

OIL PRICE COLLAPSE?

Many market scenarios being reshaped call for lower than expected oil prices.

Bank of America sees the price of oil dropping to the teens in the event of a short war in the Persian Gulf and jumping to $40-50/bbl briefly if Iraq succeeds in damaging Saudi oil production facilities.

BOA Chief Economist John Oliver Wilson puts forth two war scenarios:

  • A short war, lasting less than 8 weeks. Saudi production facilities escape virtually unscathed, Kuwaiti facilities are severely damaged, and Iraqi facilities are moderately damaged. World strategic reserves are available but not needed. After the war, Iraqi and Kuwaiti oil production return to normal. Iraq's defeat eliminates its influence in OPEC, leading to continued production over quota by other OPEC members. Oil prices drop to $16/bbl by May. However, OPEC regroups and stabilizes prices at about $20/bbl by yearend. For 1991 overall, oil prices average $18.71/bbl.

  • A long war, lasting as long as 6 months. Kuwaiti and Iraqi facilities are severely damaged, and Saudi facilities are slightly damaged. Strategic reserves are needed and used. Saudi facilities are repaired within a few months, but Kuwait's and lraq's production is not restored until 1992. Damage to Saudi facilities and fear of further such damage push oil prices to $40-50/bbl in February. Oil prices decline slowly to about $25/bbl in June, then drop sharply to $20/bbl in July as the war ends, with the average price at $26.04/bbl for the year.

Under a short war scenario, the U.S. economy will begin to rebound from its current recession in the second quarter, Wilson said.

With a short war, consumer and business confidence will be restored.

In addition, the drop in oil prices will increase consumer and business purchasing power by about $29 billion/year, or an increase of about 0.5% in total demand for U.S. goods and services, he estimated.

Further, a $10/bbl drop in oil prices would redistribute about $33 billion/year from U.S. oil producers to U.S. oil consumers, Wilson said.

"Since oil consumers have a slightly greater tendency to spend than oil producers, this will further stimulate the economy."

A short war would cost anti-Iraq coalition governments about $40 billion, Wilson said.

With a long war, consumer confidence would fall further, slowing the economy more and delaying a stimulus to the economy from falling oil prices until the second half, Wilson said.

He pegs a long war's cost at about $70 billion.

MERRILL LYNCH'S VIEW

Merrill Lynch, noting the overestimation of Iraq's offensive military capability, expects Iraq to continue nuisance type tactics such as oil spills, mines, and missiles aimed at Persian Gulf tanker traffic and loadings.

"Oil prices should continue to exhibit volatility in reaction to daily headlines," Merrill Lynch said. "For the near term, however, we would expect oil prices to trend up following their collapse the first day of the attack."

Merrill Lynch contends that even a systematic destruction of Kuwaiti oil facilities, putting Kuwait's production out of commission for a long time, will have little effect on markets if there is still a surplus of capacity in Saudi Arabia.

Once the war is over, oil prices will come under downward pressure, given the overhang of surplus crude on the market. However, the supply overhang may not be as excessive as believed before, and war developments could easily eliminate the overhang, Merrill Lynch contends.

Merrill Lynch places worldwide stocks at 94 days' supply at the end of the first quarter, about 4 days higher than normal, based on these assumptions:

  • The war should boost oil demand. It estimates the air war alone has hiked oil demand by 500,000 b/d, and that volume will grow with a ground war.

  • With the war extending through most of the first quarter, there will be little if any production contributed by Iraq or Kuwait.

  • Saudi and other Middle East production will decline somewhat, given the likelihood the war will at least disrupt operations, notably tanker movements.

  • The IEA drawdown of strategic reserves will be about 600,000 b/d in the quarter.

Correspondingly, Merrill Lynch thinks oil prices will drop to about $20/bbl after the war and may briefly drift even lower but not as low as $15.

"Based on the track record of experts alone, it would be tempting to conclude that forecasts of oil prices falling to the low teens are likely to be off the mark.

"Such extreme forecasts are not supported by the unfolding outlook for supply and demand either, with the prospect that the oil glut emerging after the crisis may not be as serious."

Copyright 1991 Oil & Gas Journal. All Rights Reserved.