The oil market is likely to experience a price crisis this winter; stock cover is still high, but it will take a big tumble in the second half of 1999.
This rosy outlook for oil producers comes from London's Centre for Global Energy Studies, which also said that it is in the interests of the Organization of Petroleum Exporting Countries to boost output sooner rather than later.
The most recent production figure estimates for OPEC, published by the Middle East Economic Survey, show that while the organization actually increased its total output by 285,000 b/d in July to 26.12 million b/d, the rise was entirely down to Iraq's hike of output by 470,000 b/d.
This meant that the ten members of OPEC which participated in the production cutbacks agreement in March this year - Iraq's production is currently governed by the United Nations oil-for-aid agreement and so was not included in the cutbacks deal - actually reduced output by a further 185,000 b/d.
The "OPEC 10" were said by MEES to have reduced combined production to 23.28 million b/d in July from 23.465 million b/d in June: "However...the OPEC 10 still need to reduce output by a further 304,000 b/d in order to attain full compliance with the quota target of 22.976 million b/d."
CGES noted that the price for dated Brent crude rose by 19% in July and 3% so far in August. Dated Brent closed at $20.42/bbl in London trading on Aug. 24, while October delivery Brent closed at $20.69/bbl.
"The market," said CGES, "must be expecting an alarming decline in stock cover from the third quarter 1999 onwards for it to have become backwardated right now.
"Meanwhile, OPEC is saying that its cuts will continue until March 2000. On current indications, the oil market is thus heading for a price explosion this winter, and only OPEC can prevent this by reversing its policy of output cuts."
The analyst reckons that worldwide inventories will begin to decline at a "fierce" rate of 2.1 million b/d in the second half of 1999. So far only gasoline stocks have been withdrawn, but as refinery runs pick up crude oil stocks also are expected to be tapped.
"The zero stock-change call on OPEC in second half 1999," said CGES, "will exceed OPEC's output by 2 million b/d, putting severe upward pressure on prices.
"OPEC has over-achieved its objective of raising oil prices from the depths: surely it should now consider easing the pressure on prices before it damages its own longer term prospects."
CGES said OPEC should boost its combined output by 2 million b/d when it meets in Vienna in late September, with the actual date of implementation to be determined by market conditions and not to be pre-set.
"Of course," said the analyst, "it is not just OPEC's decisions makers who will influence the price of oil in the months ahead.
"The rise in prices since January has already begun to have an effect on inflation, and this will temper future oil demand growth. At the same time, higher prices have improved the prospects for non-OPEC output."
While the Brent price is currently above $20/bbl the average for the year is still less than $15/bbl and stocks remain plentiful, argued CGES, providing little incentive for OPEC ministers to announce production increases.
"Should they not take the opportunity of doing so in Vienna," said CGES, "prices will continue to strengthen over the winter, with dated Brent averaging $23/bbl in the first quarter 2000.
"A 2 million b/d output increase in April would begin to take some of the heat out of the market, but the quarterly average price of dated Brent would not dip back below $20/bbl until the fourth quarter 2000, yielding an average price in 2000 of $20.70/bbl."
Meanwhile, evidence that Northwest Europe's production has been curtailed this year but is expected to rise significantly by yearend came from Wood Mackenzie Consultants Ltd., Edinburgh.
The analyst said that combined offshore oil and NGL averaged 6.03 million b/d in the first 6 months of the year, compared with an expected 6.49 million b/d calculated at the beginning of the year.
The analyst said that despite the first half short-fall overall production is expected to rise substantially by yearend, to give a forecast average of 6.2 million b/d for the whole of 1999.
"Despite the shortfall in the first half of 1999," said Wood Mackenzie, "production is forecast to increase substantially towards the end of the year, driven by newly commissioned Norwegian and Danish fields building up output towards plateau production levels.
"This trend is expected to continue in 2000 and could result in a year on year increase of 500-600,000 b/d from the North Sea area as a whole for 2000."
Norway's liquids output averaged 3.06 million b/d in the first 6 months of the year, a shortfall of 173,000 b/d on Wood Mackenzie's forecast.
This was attributed to lower than anticipated production from a number of large mature fields, delays to the ?sgard, Oseberg ?st, and Visund developments, and teething trouble in fields which came on stream in the last 2 years, namely Ekofisk II, Njord, Norne, and Varg.
Yet the analyst predicts that Norway's oil and NGL output will average 3.2 million for the whole of 1999, an increase from 3.14 million b/d last year: "However, considerable uncertainty still remains about the performance of new and recent developments."
The U.K. oil and NGL total output averaged 2.67 million b/d for the first 6 months of 1999, which was 272,000 b/d less that the analyst's forecast.
New developments offshore the UK are expected to increase production significantly towards the yearend, raising average output for the year to 2.67 million b/d, a new record for annual UK production and a 54,000 b/d hike on the 1998 average.
Danish oil and NGL production was said to have performed broadly as expected from January to June, averaging 273,000 b/d. Denmark's production is expected to rise through the last 6 months of the year. boosted by the completion of the South Arne development, with a new average annual production level of 304,000 b/d anticipated. This would be up 66,000 b/d from the 1998 average daily production.
Oil and NGL production offshore The Netherlands was said to show only minor variations from the forecast, with combined output averaging 25,500 b/d during the first half. However, Dutch liquids production is expected to decline moderately during the latter half of 1999, to give an average of 25,000 b/d for the year compared with 27,000 b/d for 1998.
