The oil market will need an increase in supply from the Organization of Petroleum Exporting Countries in 2000.
Members of the exporters' group, exercising unusual quota discipline, held enough crude off the market in 1999 to accommodate a large and necessary withdrawal from inventories.
By the end of 1999, however, it was clear that the stock withdrawal was approaching its limits.
OPEC's production of crude oil in the fourth quarter, at an estimated average of 26.2 million b/d, fell 2.8 million b/d short of what the market needed, even with output rising outside the producers' group. Oil from stocks made up the difference. But stocks can't supply the market indefinitely.
Month-by-month averages in the fourth quarter reflected a market rapidly tightening.
According to the International Energy Agency's Dec. 8 Monthly Oil Market Report, worldwide demand, after averaging 74.74 million b/d in the first three quarters of the year, climbed to 75.82 million b/d in October, 76.58 million b/d in November, and an estimated 78.3 million b/d in December.
Part of the increase was seasonal. But strong economic growth in North America, recovery in Asia, and resumption of growth in recently sluggish countries of Europe, especially France, also stimulated consumption.
Oil supply from outside OPEC was rising much less rapidly than demand. IEA estimated non-OPEC supply at an average of 44.35 million b/d in the first three quarters, 44.77 million b/d in October, 45.22 million b/d in November, and 45.3 million b/d in December.
That left OPEC and stocks to fill demand.
OPEC members other than Iraq were limiting output in line with the 23 million b/d group quota that they set in April 1999 and mostly adhered to through the year.
And Iraqi production, not covered by the quota, sputtered in late November. Under a United Nations program allowing Iraq to export oil despite sanctions imposed after its 1990 invasion of Kuwait, the country had produced an average of 2.6 million b/d in the first three quarters of 1999, according to IEA.
During a quarrel with the UN over renewal of the program, however, Iraq quit producing oil for 3 weeks beginning Nov. 24. The interruption pulled the month's average for Iraqi production down to 2.37 million b/d and IEA's outlook for the December average to 600,000-1.7 million b/d. It also focused attention on doubts about the country's ability to keep production at recent levels without making major investments in its oil fields and exporting infrastructure. Physical capacities and price are now the only limits on Iraqi output; as part of the agreement that restored Iraqi production in December, the UN ended the revenue ceiling for oil exported under the oil-for-food program.
The gap in Iraqi flow added to the pressure on supply from global inventories. With non-Iraqi production from OPEC close to November's average of 23.4 million b/d, a whopping 5.1-6.2 million b/d had to come from stocks in December to meet demand at the level IEA expected, depending on Iraqi flow.
IEA expected 3 million b/d to come from stocks in the industrialized countries of the Organization for Economic Cooperation and Development and 2.7-3.8 million b/d from outside OECD, where volumes available are always less certain.
Prices reflected the intensifying competition for supply. The futures price of crude in New York jumped to $27/bbl while Iraq wasn't producing and settled back to $25-26/bbl later.
Contrasting starts
So the beginning of 2000 contrasts sharply with the start of 1999.
Last year began with inventories far too high in relation to demand and prices at half their recent levels with no immediate prospect for increases.
The worry about inventories now is how long they can supplement supply at the recently high rates of withdrawal.
Like last year, however, 2000 begins with attention focused on a scheduled March meeting of OPEC ministers. Last year the question was whether OPEC would cut production to balance a market in surplus. This year the question is whether it will raise production to balance a market swinging toward shortage.
In fact, OPEC probably will have to confront the production question before March.
If weather is normal and demand meets expectations, the inventory draw might become difficult to sustain before the end of winter. Unless non-OPEC production can rebound faster than anyone expects, prices will spurt.
Collectively or otherwise, OPEC members will have to decide whether to raise production to meet demand or to hold fast to quotas, force demand to adjust to available supply, and let prices rise. The costs of the latter option to OPEC members would be the erosion of oil demand and an eventual resurgence of production from outside the group.
Prices much above recent levels might also provoke political retaliation, such as the sales from strategic storage that have been suggested in the US.
The most likely scenario is for OPEC members with spare production capacity to begin ignoring quotas if prices rise much further.
Then, in March, OPEC ministers can adjust quotas to what their countries are already producing. OPEC has made quota decisions that way in the past-albeit with disastrous results in November 1997 when the group failed to understand how seriously that year's financial collapse in Asia would cut oil demand.
The outlook
IEA projects 2.4% growth in worldwide oil demand this year to an average of 77.1 million b/d. Last year, demand increased negligibly.
Demand will grow faster outside the OECD than within it: 3.2% vs. 1.9%.
IEA projects demand growth of 4.7% in China and 4% in non-OECD Asia as economies complete their recoveries and expand. Demand in the former Soviet Union will increase 2.6% this year, Latin America 2%, the Middle East 2.3%, and Africa 4.2%.
Among OECD members, IEA expects demand gains of 1.9% in North America, 1.3% in Europe, and 2.3% in the Pacific region.
Total oil supply from outside OPEC will increase in 2000-but not by nearly enough to fill the increase in demand. IEA projects an 800,000 b/d increase in non-OPEC supply to an average for the year of 45.3 million b/d.
That leaves 1 million b/d on average for the year that must come from a combination of inventories and increased OPEC production. IEA doesn't make projections for these elements of supply.
OGJ assumes a 2.1 million b/d stock draw in the first quarter and an increase in OPEC crude production to 27.7 million b/d. By either coordinated adjustment or independent actions of the members, that means 2.2 million b/d above the current group quota if Iraq can hold output at 2.6 million b/d.
According to the OGJ outlook, OPEC will produce 27.7 million b/d of crude through the second and third quarters, having set the group quota without Iraq in March at 25.1 million b/d. In the fourth quarter the group will raise the quota in response to demand gains to bring total OPEC output to 28.5 million b/d.
The role of stocks this year depends on how close inventories are now to true minimum operating levels. OGJ assumes that system efficiencies provide more flexibility than existed in years past.
The industry thus can sustain the heavy stock draw expected for the first quarter, encouraged by the period's elevated prices.
As demand subsides seasonally in the second quarter, falling prices will encourage purchases for inventory, so stocks will build by an estimated 200,000 b/d.
If OPEC production does stay at 27.7 million b/d in the third quarter and non-OPEC supply increases no more than expected, stocks will have to decline by 600,000 b/d to meet the seasonal demand bounce then rise to 1.7 million b/d in the high-demand fourth quarter.
