Though traders continue to test market support for the Organization of Petroleum Exporting Countries' $25/bbl target, last month's decision by the 10 voting members of OPEC to cut a further 1 million b/d from collective production has gone some way toward seeing off a feared crude price slide.
Analysts' views of the wisdom of this reduction-and the likely immediate and longer-term effects of the "success" of OPEC's price-bolstering strategy-however, remain divergent.
ABN-AMRO Bank NV this month raised its Brent crude price forecast for the year to $25/bbl and to $24/bbl through to 2004. There are "inevitable uncertainties" surrounding any oil price projection, but bank analysts reason that OPEC should hit the lower rings of its $22-28/bbl price target because capacity utilization will stay high-83-85%-for 3-4 years, creating an environment conducive to its lately developed cohesion. OPEC's tactical commitment to revenue over market share, as spearheaded by its most influential member, Saudi Arabia, along with "counterintuitively" strong US and global oil demand, ABN-AMRO believes, will mean a "stronger-for-longer forecast is more consistent with the fundamentals than a simple return to the average of the 1986-99 period."
Apparent success
The London-based Centre for Global Energy Studies is less sanguine. Its analysts see the apparent success of OPEC's March production cut as "masking longer-term problems"-including low stock levels and the potential for a dramatic price spike late in 2001-without even obviating the possibility of some near-term price weakness (OGJ, Apr. 9, 2001, Newsletter, p. 5).
"The problems caused by OPEC's latest output cut will not be felt until later in the year," stated CGES. "With output maintained at around 27.2 million b/d over the summer, dated Brent would average close to $25/bbl. However, refiners will be unable to replenish gasoline stocks in advance of the driving season and have to maximize gasoline production over the summer at the expense of heating oil.
"As in 2000, this will leave Asian and Atlantic basin refiners competing for crude in the autumn, when they need to replenish heating oil stocks ahead of winter," it adds.
Economic outlook
The overriding issue in soothsaying a crude price outlook, as CGES rightly emphasizes, is the inscrutability of the global economy's short-term future. Side with the optimists, and you see the US economy briefly slip its gears before getting back on track, with little effect on Asia and Europe; take the pessimist's view, and the US slides into a protracted recession, resulting in a knock-on slowdown in Asia as the region's export markets contract.
ABN-AMRO opines that the global economic outlook would have to remain "more depressed than is currently forecast, and for longer" for there to be an appreciably baleful impact on oil demand in the longer-term. It makes the historical case that worldwide demand-excluding the former Soviet Union-has grown since 1983 despite recessions in the West and several Asian economic crises.
The wrinkle comes in the "shape" of future demand: in Europe, taxation policy and a growing market for gas will subdue demand, while emerging economies, including China's, won't be able to stomach crude prices like those seen last year. Realistically, as CGES notes, even a $25/bbl price will likely "do nothing to stimulate global oil demand growth."
