Oil markets are expected to improve as a result of the production increases that the Organization of Petroleum Exporting Countries engineered in Vienna in late March, although another production increase will be necessary before yearend. This view was expressed by the International Energy Agency in its April oil market report.
On Mar. 29, nine OPEC members agreed to increase their crude production targets by 1.45 million b/d as of Apr. 1 (OGJ, Apr. 3, 2000, p. 26). After hesitation, Iran also decided to raise output, bringing about a 1.72 million b/d production increase. The actual jump in output will be less, though, as the OPEC 10 (OPEC excluding Iraq) were already producing 1.25 million b/d above quotas during March, according to IEA.
IEA says, however, that supply will be insufficient to meet higher demand in the second half of this year unless there is another significant boost in crude oil production beyond this quota increase. By current IEA estimates, an additional 1 million b/d of supply will be necessary to meet demand during the second half of 2000.
IEA expects global oil demand to average 76.7 million b/d this year, 1.6 million b/d higher than in 1999. "Estimated growth has been reduced slightly to reflect first quarter weakness, but this decline has been partially offset by higher anticipated growth in China and [South] Korea."
The agency says that current stocks are healthier after first quarter demand fell below expectations. The combination of warm weather, crude stocks left over from Y2K buildups, and larger-than-expected non-OPEC supply has resulted in a first quarter global stock draw that was much smaller than expected.
"In addition, the shift from low prices and mild contango a year ago to high prices and steep backwardation last quarter reduced demand."
IEA had estimated the first quarter stock draw at 2 million b/d but has revised that figure to 1.1 million b/d.
Instead of collapsing, crude oil prices have fallen with a "soft landing," as IEA calls the recent $9/bbl price drop, making the current market more attractive for both producers and consumers.
Crude oil prices have adjusted downward, and forward price curves have flattened. Also, crude stocks are beginning to build before product stocks. This is allowing refiners to enjoy much better margins and encouraging them to increase their throughputs to rebuild product stocks, as extremely low inventory levels bid up product prices.
Contrary to other major refining center margins in March 2000, US Gulf Coast refining margins were constrained by the high price of West Texas Intermediate crude. US Gulf Coast cracking margins averaged less than $1/bbl last month. According to the IEA report, Singapore has much higher margins, strengthened by the relative weakness of Dubai and Oman crude prices, low product inventory levels, and US West Coast arbitrage opportunities.
IEA warns that, if refiners operate flat-out to take advantage of high margins, they risk facing unscheduled maintenance as well as driving up the price of oil through increased demand for throughputs.
EIA outlook
The US Energy Information Administration, meanwhile, says world oil prices should begin a gradual decline as increased oil production from OPEC enters the world oil market.
"Based on our assessment of world oil supply and demand, the average cost per barrel of crude imported into the US and delivered to refiners is expected to decline from an estimate of $26.75/bbl in February and March to about $25/bbl by June and to $23.50/ bbl by the end of 2000. The price is expected to continue to decline to about $21.50 by the end of 2001."
EIA said its predictions assume that OPEC, excluding Iraq and Iran, will produce 21.5 million b/d in the second quarter of 2000, or 700,000 b/d above first quarter levels. "If Iran is included," said the agency, "the increase in the second quarter is expected to be 900,000 b/d. Continued increases are expected throughout the rest of 2000 and 2001."
EIA said natural gas demand is expected to increase by 3.5% to 22.17 tcf in 2000 and 4.1% to 23.08 tcf in 2001.
"These increases follow the less than 1% growth seen in 1999, when oil prices remained reasonably competitive with gas in electric power and industrial production, and when strong nuclear power and hydroelectric power increases backed out gas use in the electric power industry," EIA said.
EIA predicts prices for regular-grade gasoline will average $1.46/gal in the US this summer, 25% higher than last summer's average of $1.17/gal.
EIA, in its latest short-term energy outlook, said monthly average prices will peak at $1.52/gal in April and decline steadily to $1.39/gal by September due to the impact of increases in worldwide crude production.
It predicted that US gasoline demand would average 8.72 million b/d this summer (April through October), an increase of 130,000 b/d, or 1.5%, over last summer. "While that represents a new record for summer season demand," said EIA, "this year's growth is well below the average seen in the previous 5 years."
The agency said US motor gasoline inventories are currently low by historical standards. Total beginning-of-season (Apr. 1) stocks were sharply below last year's levels and were near the low end of the normal range.
"Because of the low stock levels, the US gasoline market faces unusually high risks of sharp price run-ups this spring and summer, particularly if significant refinery problems are encountered. However, assuming no problems in ramping up US gasoline production, expected increases in world oil production this summer should be sufficient to prevent increases in average retail gasoline prices from their currently high levels."
It said US net imports of finished motor gasoline are projected to average 295,000 b/d, down from 327,000 b/d last summer.
"This reflects the lower availability of supplies from Europe and uncertainties about [non-US] refiners' ability to meet Phase II reformulated gasoline specifications."
Total US oil production is forecast to average 8.40 million b/d during the summer months, up 190,000 b/d from last summer.
"Refineries will be expected not only to meet the 130,000 b/d increase in demand but also to accommodate the reduced availability from stocks and net imports. As a result, refinery utilization rates for the summer are projected to average 96.8%, up from 94.3% last summer."
Jay Hakes, EIA administrator, said, "This is a substantial amount of refinery activity, but it's not something that can't be done."
