Robert J. BeckRising oil supplies in 1997 will relax some of the market tightness that drove up crude prices last year.
Associate Managing Editor-Economics
Worldwide demand for petroleum products in 1996 rose faster than anticipated and faster than supply from outside the Organization of Petroleum Exporting Countries. This increased demand for OPEC oil and pushed up prices for crude.
At yearend, the world export price of crude was up more than 25% from the same period a year earlier.
Market conditions will change in 1997. While worldwide economic growth will continue to boost demand for energy and petroleum, non-OPEC petroleum supply will grow even more. Increases in North Sea and Latin American production will help boost non-OPEC output by 1.9 million b/d. And revenues from 1996 production gains will make additional investment possible in exploration and production.
The increase in non-OPEC supply will suppress demand for OPEC oil. Exports from Iraq, which resumed late in 1996 under United Nations sanctions, will force OPEC to cut its members' output to balance the market or face price declines.
Prices likely will slide when demand falls from the lofty levels of the Northern Hemisphere's heating season.
Oil production and consumption in the former Soviet Union (FSU), meanwhile, have stabilized. The International Energy Agency (IEA) projects that demand in the FSU will stop sliding this year and remain at the 1996 level of 4.5 million b/d. It also projects an increase in FSU oil production of 200,000 b/d to a yearly average of 7.2 million b/d.
World economic growth
The latest Annual Energy Outlook by the U.S. Energy Information Administration (EIA) projected a long range average annual economic growth rate of 4.3% for developing countries. And it projected a collective 2.5% average annual growth rate for members of the Organisation for Economic Cooperation and Development (OECD).
For 1997, the OECD projected a 2.5% growth rate for member countries as a group, up from an estimated 2.1% in 1996 and 1.9% in 1995.
The 1997 growth rate for OECD Europe was projected at 2.7%, up from 1.6% in 1996. Economic growth in Japan in 1997 is projected at 2.4%, up from 2.2% in 1996.
The International Monetary Fund (IMF) estimated the 1996 economic growth rate in the developing countries at 6.3%. The IMF also estimated a turnaround in the economic slide in the "countries in transition" of East Europe and the FSU. Aggregate economic growth was estimated at 3.4%, compared to a decline of 2.1% in 1995.
World oil demand
Strong economic growth boosted worldwide demand for petroleum products in 1996. According to the IEA, world demand rose to an average 71.8 million b/d from 70.1 million b/d in 1995. World petroleum demand averaged 68.9 million b/d in 1994 and 67.6 million b/d in 1993.
The IEA projects an increase in petroleum demand this year of 1.9 million b/d to an average of 73.7 million b/d. Much of the recent and projected increase in demand has been in developing areas, particularly Asia. But increases in demand have also been posted in the developed industrial countries.
Demand in the OECD industrial countries moved up to 41.1 million b/d in 1996 from 40.3 million b/d the year before. OECD demand is projected at 41.7 million b/d in 1997.
Demand in non-OECD developing countries increased to 30.7 million b/d in 1996 from 29.8 million b/d in 1995. This was in spite of a 200,000 b/d drop in the FSU.
The largest increase in demand this year will again be in the Asian developing countries, where petroleum consumption is expected to move up 600,000 b/d to 9.2 million b/d after a gain of the same size last year. Oil demand for this group of countries has increased rapidly, moving up from 6.9 million b/d in 1993.
Demand in Latin America is expected to move up 300,000 b/d to 6.6 million b/d in 1997. This comes after a 200,000 b/d increase last year.
Demand in China is expected to increase 200,000 b/d to 3.8 million b/d after a 300,000 b/d increase in 1996.
Demand in 1997 in Africa and the Middle East is projected to move up 100,000 b/d after remaining constant in 1996. Demand in Africa is projected at 2.3 million b/d in 1997 and in the Middle East at 4.2 million b/d.
Oil demand in East Europe and the FSU slipped from 6 million b/d in 1995 to 5.9 million b/d last year. The decline was in the FSU, where demand fell by 200,000 b/d to 4.5 million b/d. In East Europe demand increased 100,000 b/d to 1.4 million b/d.
This year, as demand levels off in the FSU, demand in East Europe is projected to increase 100,000 b/d to 1.5 million b/d as economic recovery continues.
Worldwide supply
The sharp increase in world demand led to an increase in OPEC liquids production in 1996.
According to the IEA, OPEC crude oil production moved up to 25.7 million b/d in the first quarter of 1996, slipped to 25.6 million b/d in the second quarter as world demand fell, then jumped to 26 million b/d in the third quarter. OGJ estimates that OPEC output will average about 26 million b/d in the fourth quarter, resulting in average crude output for the year of 25.8 million b/d. That is up from 25.1 million b/d in 1995.
OPEC output of NGL and condensate averaged 2.6 million b/d in 1996, up from 2.4 million b/d in 1995. OPEC output of NGL has been rising and was up to 2.7 million b/d in the fourth quarter last year. As a result, total OPEC liquids production averaged an estimated 28.4 million b/d in 1996, up from 27.5 million b/d in 1995.
IEA estimated non-OPEC liquids output at an average 42.1 million b/d in 1996, compared with 40.9 million b/d in 1995, 40.1 million b/d in 1994, and 39.4 million b/d in 1993. The increase in non-OPEC output came in spite of declining production in the FSU and the U.S., two of the largest producing countries in the world.
FSU output has been falling since 1989, when it averaged 12.2 million b/d. It averaged 7.1 million b/d in 1995 and 7 million b/d last year.
U.S. liquids output has been declining since 1985, when it averaged 10.6 million b/d. Liquids output averaged an estimated 8.55 million b/d last year.
Contributions to higher non-OPEC output have occurred worldwide. In recent years there have been significant increases in the North Sea fields of Norway and the U.K.
Production in the U.K. averaged an estimated 2.633 million b/d in 1996, up from 2.565 million b/d in 1995, 2.469 million b/d in 1994 and 2.14 million b/d in 1993. Production in Norway averaged an estimated 3.085 million b/d in 1996, up from 2.782 million b/d in 1995, 2.579 million b/d in 1994, and 2.38 million b/d in 1993.
According to IEA estimates, Latin American production moved up 400,000 b/d to an average 6.5 million b/d in 1996. Production in China increased 100,000 b/d to 3.1 million b/d. And output in non-OPEC Africa increased 100,000 b/d to 2.7 million b/d.
Output in Asian non-OPEC countries fell 100,000 b/d to 2 million b/d. Non-OPEC Middle East production remained at 1.9 million b/d.
Worldwide supply outlook
IEA projects another large increase in non-OPEC supply in 1997, estimating that non-OPEC liquids production will move up 1.9 million b/d to average 44 million b/d.
Total non-OPEC supply, including processing gain, will move up to 45.6 million b/d in 1997.
There will be some seasonal fluctuation, with non-OPEC supply averaging 45.5 million b/d in the first quarter, 45 million b/d in the second quarter, 45.2 million b/d in the third quarter, and 46.9 million b/d in the fourth quarter. The production gain expected in the FSU will remove an important offset to non-OPEC supply.
Latin American production is projected to move up 500,000 b/d to 7 million b/d. Production in non-OPEC Africa is projected to be up 300,000 b/d at 3 million b/d. In addition output is projected to move up 100,000 b/d in China and the non-OPEC Middle East. Processing gain is expected to move up to 1.6 million b/d.
This year the increase in non-OPEC output and the reversing of the decline in FSU production will make it difficult for OPEC to maintain its current output level. In recent years declining production in the FSU, increases in world demand, and the embargo on Iraqi exports enabled many OPEC countries to produce at close to capacity. That also made it easier for the group to maintain production discipline and agree on quotas.
With non-OPEC supply gains able to meet expected demand increases this year, OGJ estimates that the call on OPEC crude oil and NGL will slip to an average 28.1 million b/d from 28.4 million b/d last year. This will include 2.8 million b/d of NGL, up from 2.6 million b/d in 1996.
As a result the demand for OPEC crude oil will fall 500,000 b/d to an average 25.3 million b/d.
This is based on the assumption that there will be no change in world stocks in 1997. World stocks increased at a rate averaging 200,000 b/d in 1995.
As it responds to sagging demand for its oil, OPEC also will have to make room for renewed, although limited, supplies from Iraq. Currently, Iraq is being allowed to export about 700,000 b/d. Iraqi output is expected to continue at least at this level throughout 1997 and may go higher.
The call on OPEC oil depends upon several major factors, foremost among them the actual increases in world oil demand and in non-OPEC output. In addition, reversal of FSU output will be important. If the FSU is able to boost output and exports by more than is expected, there will be less room in the market for OPEC oil.
Stock behavior will also play a role. A buildup increases demand for OPEC oil.
Under current expectations, OPEC will have trouble producing at recent levels without weakening prices. Most member countries have benefited from recently elevated price levels; to maintain them, the group will have to reduce quotas and enforce production discipline.
The factors in the 1996 crude price surge-higher than expected demand and lower than expected non-OPEC supply-are not expected to recur this year.
IEA estimates that in the fourth quarter of 1996 world demand surged to 73.9 million b/d, up 2 million b/d from a year earlier. OGJ estimates that total OPEC liquids production in fourth quarter 1996 averaged 28.6 million b/d, and world supply increased to 72.6 million b/d.
Supply at that level would indicate a stock reduction of 1.3 million b/d; however, during the second and third quarters of 1996, petroleum stocks increased at an estimated rate of 1.5 million b/d. Therefore, although stocks were reduced sharply in the fourth quarter there will not be a need to rebuild stocks in 1997.
If IEA estimates of demand and non-OPEC supply are correct then the need for OPEC production will slip to 27.7 million b/d in the first quarter of 1997.
The challenge on OPEC to reduce quotas in line with declining demand for its oil will be compounded by recent increases in production capacity by several members. Also, some members have produced above quota with impunity recently and may be reluctant to cut output.
Prices
Crude oil prices surged in March and April last year, driving up the cost of petroleum products as refiners rebuilt stocks drawn down sharply in the cold first quarter of the year.
Crude prices moved up again in the third quarter as demand remained high and stocks were increased in anticipation of winter demand. Prices moved even higher in the last quarter as colder than normal winter weather drove up demand and tightened the market.
The average price of world export crude oil rose from $17.39/bbl in January 1996 to $20.50/bbl in April. As demand slipped with warmer weather, the price dipped to an average of $18.11/bbl in July before increasing to an average of $22.32/bbl in November and $23.20/bbl in December.
The crude oil price during 1997 will depend upon a number of key factors that have an impact on supply and demand. The pace of economic growth worldwide will be a key factor. The current outlook is for a significant rate of economic growth in many areas of the world. That will result in increased energy demand and higher oil demand.
In addition to demand, which will depend mainly on economic performances around the world, a key factor in the price of crude oil this year will again be non-OPEC supply. Major production increases are expected in the North Sea as well as in the developing countries of Latin America and Africa.
In addition, investment of the revenue gains from last year's price surge could yield production increases by yearend 1997.
Other price influences will be OPEC's response to its challenges and the difficult-to-predict balance between consumption and production in the FSU, which will determine how much crude the region can export.
International drilling
The level of international exploration and drilling activity in 1997 depends upon the trend in crude oil prices.
Last year's rise in crude oil prices boosted the international rig count, which had slipped in recent years.
The Baker Hughes international count of active rotary rigs outside the U.S. and Canada averaged an estimated 792 in 1996. This was up from 759 active rigs internationally in 1995.
The annual average international rig count had slipped steadily from 922 in 1989.
Copyright 1997 Oil & Gas Journal. All Rights Reserved.
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