Beyond OPEC compliance

Nov. 15, 1999
It is time for the oil and gas industry to think about market fundamentals beyond the extent to which members of the Organization of Petroleum Exporting Countries abide by their April 1999 production agreement.

It is time for the oil and gas industry to think about market fundamentals beyond the extent to which members of the Organization of Petroleum Exporting Countries abide by their April 1999 production agreement. While OPEC compliance remains important, other factors deserve attention.

The importance to the market of OPEC production restraint is evident in the International Energy Agency's latest Monthly Oil Market Report. IEA estimates average OPEC output in October at 26.32 million b/d and in September at a revised 26.21 million b/d. The September figure represents 91% compliance with the April agreement, the October figure 87%. In effect, the oil OPEC holds off the market makes room for withdrawal from inventories, which became excessive after Asian demand slumped in 1997-98. IEA estimates the stock-draw among members of the Organization for Economic Cooperation and Development at 1.8 million b/d-a significant rate much needed by the market.

Focus of attention

The OPEC production-global inventory dynamic has been the focus of market attention all year. And rightly so. Inventories had to come down. With OPEC production still holding steady and inventories now plunging, the time is right for concern about how the market will look after inventory pressures subside. A proper focus of such concern is demand and its main driver, economic growth, especially in Asia.

There, too, the signs are positive. At the World Economic Forum's eighth annual East Asia Economic Summit last month in Singapore, Stanley Fischer of the International Monetary Fund offered this summary of global conditions: "The world economy appears to be on the mend, the Asian economies are reviving, financial market confidence has returned, and-most important for the Asian recovery-Japan is showing signs of growth."

IMF's autumn World Economic Outlook projected increases in world output growth to 3% in 1999 and 3.5% in 2000 from 2.5% in 1998. The gains will come partly from continued growth in the US, a gradual revival in Europe, and recovery in Latin America.

"Most importantly, however, it reflects substantial recoveries and upward revisions for growth across Asia," Fischer said. IMF expects growth in the region of 4.1% this year and 4.3% in 2000. Compared with IMF's May outlook, those rates are up 1.4 percentage points for 1999 and 0.2 percentage point for 2000.

Much of the improvement will occur in Japan, which accounts for more than half of Asia's economic output and whose recovery Fischer called "absolutely critical for Asia." IMF expects Japanese growth of 1% this year and 1.5% in 2000-both figures representing large revisions from the May forecast. "And it would not be a surprise if the final results for both this year and 2000 exceed the current IMF forecasts," Fischer said.

The countries hurt most by the Asian financial crisis-Indonesia, Malaysia, Philippines, Thailand, and South Korea-will together grow by an average of almost 3% this year and 4% in 2000, according to IMF.

Asia's rebound is good news for the oil and gas business-better even than OPEC production restraint over the long term. Before its financial collapse, Asia was the region of fastest growth in demand for petroleum.

Steady growth

Recovery, however, is never a sure thing. Fischer and others at the East Asia summit cited the structural reforms needed by Asian economies. And Fischer noted that Asia's fortunes depend greatly on the "external environment" presented by industrial economies. "For the global recovery to continue," he said, "European and Japanese growth will need to pick up sufficiently to offset the inevitable slowing of growth in the United States."

While no one expects Asian oil and gas demand growth to return to the double-digit rates common before mid-1997, steady growth at lower rates beats no growth at all. It certainly brightens the light, now coming into view, at the end of the inventory tunnel.