Growth In World Demand For Oil To Ease In 1998

Robert J. Beck
Associate Managing Editor-Economics

Worldwide Supply and Demand [88,863 bytes]

Increasing international supplies of oil and slowing demand growth threaten to weaken prices this year.

In 1997, worldwide demand for petroleum products, boosted by an early-year stock build, grew faster than did supply from outside the Organization of Petroleum Exporting Countries. The market remained in balance for most of the year and supported crude oil prices in the range of $17-20/bbl.

But crude oil prices weakened in December. The average world export price fell to an estimated $16.40/bbl in December from $18.86/bbl in October and $18.27/bbl in November.

Worldwide economic growth is expected to boost worldwide demand this year but not as much as in 1997. And financial problems in Asian industrializing countries may dampen economic growth.

This year, the increase in non-OPEC petroleum supply is projected to be greater than the increase in demand. Gains in North Sea and Latin American production will help boost non-OPEC output by 2.1 million b/d.

Oil production and consumption in the former Soviet Union (FSU) have reversed their declines of the 1990s. The International Energy Agency (IEA) estimates that FSU oil demand moved up 200,000 b/d in 1997 to 4.5 million b/d and projects it at 4.6 million b/d this year. IEA also estimates 1997 crude output in the FSU at 7.2 million b/d vs. 7.1 million b/d the year before. It projects 1998 output at 7.5 million b/d.

World economic growth

The U.S. Energy Information Administration (EIA) International Energy Outlook projects average economic growth of 4.5%/year for nonindustrialized countries through 2015, compared with 2.4%/year for 1985-95.

For developing countries excluding the FSU and East Europe, EIA projects long term economic growth at 4.7%/year, compared with 5.1%/year in the earlier period.

The strongest growth is expected for Asia: 5.8%/year through 2015 compared with 7.2%/year in 1985-95.

The same report projected a 2.4%/year average growth rate for industrialized countries, up slightly from the 2.3%/year in the earlier period. The strongest growth was anticipated for the Pacific industrial countries at 2.7%/year, up from 2.4%/year.

For 1998 the Organisation for Economic Cooperation and Development (OECD) projected 2.7%/year growth for member countries as a group. This is up from estimated growth of 3% in 1997, 2.6% in 1996, and 2.2% in 1995.

Economic growth for the seven largest industrial countries was projected at 2.4% in 1998 vs. 2.9% in 1997. Economic growth for this group of countries was 2.3% in 1996 and 2% in 1995. The highest growth was projected for Canada at 3.3% in 1998 compared with 3.5% in 1997. Japan's economic growth was projected at 2.9% vs. 2.3% in 1997. Growth of 2.8% was projected in 1998 for Germany (vs. 2.2% in 1997) and France (vs. 2.5% in 1997).

For the 21 smaller OECD countries the 1998 economic growth rate was projected at 3.8% in 1998, compared with 3.7% in 1997, 3.8% in 1996, and 2.8% in 1995.

All of these projections were made before economic and financial problems surfaced last year in the Far East. Korea's economic growth was projected at 6.5% for 1998, up from 5.3% in 1997. Such an increase now seems unlikely.

World oil demand

According to the IEA, average world demand climed to 73.8 million b/d in 1997 from 71.7 million b/d in 1996. World petroleum demand averaged 70.1 million b/d in 1995 and 68.6 million b/d in 1994.

The IEA projects an increase in petroleum demand this year to an average 75.6 million b/d. The majority of the recent and projected future increase in world demand has been in the developing areas, particularly in Asia.

Demand in the OECD industrial countries moved up to 41.9 million b/d in 1997 from 41.3 million b/d the year before. OECD demand is projected at 42.4 million b/d in 1998.

Demand in the non-OECD developing countries increased to 31.8 million b/d in 1997 from 30.4 million b/d in 1996 and 29.5 million b/d in 1995.

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 9.6 million b/d. This follows a 500,000 b/d increase 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 200,000 b/d to 6.8 million b/d in 1998. This comes after a 300,000 b/d increase last year. Demand in China is expected to increase 300,000 b/d to 4.2 million b/d after a 300,000 b/d increase in 1997. Demand in 1998 in Africa and the Middle East is projected to move up 100,000 b/d after a similar increase last year. Demand in Africa is projected at 2.4 million b/d in 1998 and in the Middle East at 4.3 million b/d.

Oil demand in East Europe and the FSU increased last year to 5.8 million b/d from 5.5 million b/d in 1996.

Worldwide supply

According to the IEA, OPEC crude oil production moved up to 26.8 million b/d in the first quarter of 1997 and remained at that level in the second quarter even though world demand fell from winter levels. An increase in stocks supported the output level.

OPEC crude production moved up to 27.3 million b/d in the third quarter as demand increased and stocking continued. OGJ estimates that OPEC crude output will average 27.7 million b/d in the fourth quarter, resulting in average crude output for the year of 27.2 million b/d, up from 25.8 million b/d in 1996.

OPEC output of NGL and condensate averaged 2.8 million b/d in 1997 vs. 2.6 million b/d in 1996. As a result total OPEC liquids production averaged an estimated 30 million b/d in 1997, up from 28.5 million b/d in 1996.

IEA estimated average non-OPEC liquids output at 42.9 million b/d in 1997 vs. 42.1 million b/d in 1996, 41 million b/d in 1995, and 40.2 million b/d in 1994. Non-OPEC supply was boosted by 1.6 million b/d from processing gain in 1997.

U.S. liquids output fell slightly in 1997 to an estimated 8.59 million b/d. It has been declining since 1985, when it averaged 10.6 million b/d.

Contributions to non-OPEC output have been worldwide. In recent years there have been large increases in the North Sea, although in 1997 production in the U.K. slipped to an average of 2.76 million b/d from 2.81 million b/d in 1996, according to IEA. Output in Norway moved up to 3.31 million b/d in 1997 from 3.23 million b/d in 1996.

According to IEA estimates, Latin American production moved up 400,000 b/d to an average 6.9 million b/d in 1997. Production in China increased 100,000 b/d to 3.2 million b/d. And output in non-OPEC Africa increased 100,000 b/d to 2.8 million b/d.

Output in Asian non-OPEC countries remained at 2.1 million b/d. And non-OPEC Middle East production remained constant at 1.9 million b/d.

Worldwide supply outlook

IEA expects non-OPEC liquids production to move up 2.1 million b/d this year to average 44.8 million b/d. Total non-OPEC supply, including processing gain, will move up to 46.4 million b/d in 1998.

There will be some seasonal fluctuation, with non-OPEC supply averaging 46.1 million b/d in the first quarter, falling to 45.9 million b/d in the second quarter, and then moving up to 46.2 million b/d in the third quarter and 47.5 million b/d in the fourth quarter.

Latin American production is projected to move up 500,000 b/d to 7.4 million b/d. Production in non-OPEC Africa is projected to be up 200,000 b/d to 3 million b/d. In addition output is projected to move up 100,000 b/d in non-OPEC Asia, excluding China. Processing gain is expected to remain at 1.6 million b/d.

The increase in non-OPEC output and 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 of the OPEC countries to increase output and produce at close to capacity, often in violation of group quotas.

This year, the expected increase in worldwide demand can be met entirely from the increase in non-OPEC supply. And it is doubtful that stocks will be boosted as they were in 1997. As a result the call on OPEC oil will be lower in 1998 than it was last year despite the gain in worldwide consumption.

OGJ is estimating that the call on OPEC crude oil and NGL will slip in 1998 to an average 29.2 million b/d from 30 million b/d last year. This will include 2.9 million b/d of NGL, up from 2.8 million b/d in 1997. So the demand for OPEC crude oil will fall 900,000 b/d to an average 26.3 million b/d if stocks don't change. World stocks increased at an average of 700,000 b/d in 1997.

Whether OPEC will have to accommodate a jump in output Iraq is unknown. Under the UN's oil for food program, Iraq can produce and export enough to raise $2 billion every 6 months, which works out to about 700,000 b/d for export. It also can produce enough to pay transit fees for a pipeline across Turkey and to maintain exports to Jordan. In addition, the UN has allowed it to make up volumes for periods, such as last June through August, when Iraq was producing nothing under the oil for food program.

If the UN doesn't lift its embargo and nothing else chenages, Iraqi production in 1998 will remain at about its 1997 average: 1.2 million b/d. That was up from 580,000 b/d in 1996.

The eventual call on OPEC oil will depend mostly on the increases in world oil demand and in non-OPEC output. Stock change, as always, will play a role. A stock draw would reduce the call on OPEC oil.

OPEC's new quota of 27.5 million b/d is close to 1997 demand for OPEC oil but well above the projected, zero-stock-change call on OPEC crude (26.3 million b/d).

Failure by Iraq to produce at its new quota level of 1.3 million b/d, coupled with unusual discipline by OPEC's usual overproducers, might keep OPEC output in line with demand for the group's oil. So would lower than expected increases in non-OPEC supply and another stock build.

But demand for OPEC oil may fall short of expectation, expecially if Asian economies perform worse than expected.

Clues to the ability of OPEC to balance the market will probably surface in the first quarter of this year. World demand is projected to be up 400,000 b/d from fourth quarter 1997 due to economic growth and seasonal heating requirements. But non-OPEC supply will increase even more.

An expected stock draw will add 1 million b/d to supply. And non-OPEC output will be up 300,000 b/d. Supplies from these sources will not only meet the increase in consumption but reduce the call on OPEC oil to 26.1 million b/d in the first quarter from 27.7 million b/d in the fourth quarter last year. OPEC, therefore, will have to cut production or accept lower prices for crude.

In the second quarter, even with some additions to stocks, demand for OPEC crude oil is expected to fall to 25.5 million b/d.

The need for OPEC oil will rise in the second half of this year but, at an expected 26.1 million b/d in the third quarter and 27.3 million b/d in the fourth, won't reach the quota level.

Prices

Due to strong winter demand and tight markets, crude oil prices started last year relatively high. The price of world export crude oil averaged $23.06/bbl in January, the highest level of the year. Prices then slipped along with seasonal demand to $17.13/bbl in April and, as non-OPEC supply rose, $17.07/bbl in June.

Crude prices firmed in the third quarter and the start of the fourth quarter, increasing to an average $18.86/bbl in October. But as the year ended prices fell sharply. Even though seasonal winter demand was much higher than 1996 levels, it was more than offset by addition in non-OPEC and OPEC supplies and an end to the stock build. The average price of world export crude oil fell to an estimated $16.43/bbl in December.

For the year the price of world export crude oil averaged $18.39/bbl, down from $20.04/bbl for 1996. The price averaged $16.78/bbl in 1995.

International drilling

The expected weakening of crude prices in 1998 will reduce exploration and drilling activity.

Strong prices boosted the international rig count in 1996 and 1997. In recent years production had been sustained without increased drilling activity and without significantly higher oil prices. Sophisticated new exploration and production technology resulted in improved results from investments.

The Baker Hughes count of active rotary rigs outside of the U.S. and Canada averaged an estimated 807 in 1997 and 793 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.