Crude oil prices are on an upward trend as the market looks set to tighten, but it is not tight yet, and a return to higher production would kill the recovery.
This is the view of London's Centre for Global Energy Studies (CGES), which said that robust demand growth in the Organization for Economic Cooperation & Development is confounding all expectations.
The analyst reported that OECD oil demand growth in the first quarter was 3.2% higher than for the same period last year, raising hopes that OECD demand could rise by almost 1 million b/d in 1999.
Meanwhile, production outside the Organization of Petroleum Exporting Countries is unlikely to rise much, and oil producers within the OECD have slashed their exploration and production budgets.
Tighter market?
"Strong incremental demand and static non-OPEC supplies imply a 1 million b/d excess demand for OPEC crude in 1999," said CGES, "enough to lop off much of the stock overhang and send prices even higher."The market was almost ecstatic about OPEC's May compliance, which took overall adherence to between 87% and 90% and is clearly expecting more of the same." (OGJ, June 21, 1999, p. 28).
Yet CGES maintains that the calculations of compliance rates against OPEC's February 1999 output baseline give a false impression of OPEC members' true response to the cutbacks pledge.
"Qatar and Indonesia have yet to make any cuts," said CGES. "Iran's third-round compliance is at 54%, Nigeria's 26%, and Libya's 8%.
"While further small reductions might materialize from Iran and Nigeria, the bulk of OPEC's cuts have already been made-74% of the pledged total by the big three Gulf Arab producers."
Price recovery
Despite this, CGES contends that OPEC's current output levels will lead to a recovery of Brent crude oil to an average $16/bbl in the second half of 1999: "It will face a real problem, though, if it decides to maintain the cuts beyond March 2000, for this would cause the oil market to overheat."If OPEC extends its current cutbacks pledge beyond March 2000, CGES reckons oil prices would strengthen considerably, passing $20/bbl for Brent in the second quarter of 2000 and continuing to rise as long as OPEC holds output down.
If OPEC maintains its current compliance, CGES predicts that Brent crude will average $17.60/bbl in the third quarter, $17.80/bbl in the fourth quarter, $18/bbl in first quarter 2000, and $18.80/bbl in second quarter 2000.
If OPEC extends the cutbacks pledge beyond March 2000, CGES predicts Brent crude will average $17.60/ bbl in the third quarter, $17.80/bbl in the fourth quarter, $18/bbl in first quarter 2000, and $20.40/bbl in second quarter 2000.
But if rising prices encourage OPEC members to break their pledges further, CGES expects Brent crude to average $17.50/bbl in the third quarter, $16.90/bbl in the fourth quarter, $16/bbl in first quarter 2000, and $15.70/bbl in second quarter 2000.
"OPEC is not yet out of the woods," said CGES, "although the road ahead is becoming clearer. The cut in output already implemented will shortly be felt in lower crude arrivals in consuming areas, forcing a reduction in crude stocks.
"The organization is thus likely to enjoy rising prices from now onwards, but it needs to be vigilant on two counts: First, it needs to ensure that any leakage does not get out of hand, for this would undermine prices and damage OPEC's credibility.
"It should also, however, begin to consider output increases from April 2000 onwards to prevent the oil market from getting severely overheated." n
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