Just as some analysts are suggesting that energy prices may be stabilizing at lower levels, there is fresh evidence that oil markets are again tightening.
Jean-François Giannesini, advisor to the chairman of France's Institut Français du Pétrole, last week predicted oil prices would stabilize in the near term. He said a slowdown in global economic growth, greater quota compliance among members of the Organization of Petroleum Exporting Countries, and exploration and production programs launched by oil companies before the 1998 price collapse would help steady oil prices.
However, oil prices jumped late last week in response to massive shutdowns of facilities in the UK and Norwegian North Sea sectors taking huge volumes of oil off the market, among other factors.
Oil prices had already rebounded the week before last, breaking the $30/bbl watershed in New York as concerns mounted over oil supply.
Futures prices closed sharply higher in trading on the New York Mercantile Exchange Feb. 2. The March contract for light, sweet crude rose $1.37 to $31.19/bbl that day, while the April contract stood at $30.39, up by $1.33. In after-hours electronic access trading in New York, light, sweet crude brought $31.21/bbl for the March position and $30.44 for the April contract, both up from the NYMEX close.
In London Feb. 2, North Sea Brent crude oil futures went from strength to technical strength on the International Petroleum Exchange, in relatively thin volume.
March Brent futures soared through resistance at $29/bbl on technical buying and a general perception that supply would remain tight through the first quarter.
On Feb. 2, IPE March Brent settled at $29.19/bbl, up by $1.09 from the previous close. The day's high was $29.30 and the low $27.70.
The Organization of Petroleum Exporting Countries' basket of seven crudes stood at $26.58/bbl Feb. 2, compared with $25.13 the previous day.
The basket this year to Feb. 1 has averaged $24.05/bbl.
December's OPEC basket average was $24.13/bbl, and November's was $31.22.
The rally over the weekend preceding last week was sustained through Feb. 7, when IPE March Brent closed at $29.91/bbl, up $3.33 on the week, and NYMEX March crude settled at $31.27/bbl, up $2.61 on the week.
Meanwhile, one analyst contends that changing market fundamentals could push US natural gas prices down to near $4/MMbtu by early summer.
Energy & Environmental Analysis Inc. (EEA), Arlington, Va., made this prediction, noting that increased drilling activity boosted US gas production capacity by more than 1 bcfd between the fourth quarters of 1999 and 2000.
IFP talk
Giannesini predicted oil prices would stabilize in the near term within the OPEC's target price band.
Giannesini, speaking at IFP's Panorama conference Feb. 1 (see Watching the World, p. 31), said, "Although producing countries, consuming countries, oil majors, and smaller oil companies all want stable prices or a slight upturn at most, most agree that it is difficult to achieve complete price stability by maintaining a balance between supply and demand," he said.
"At best, given the current market conditions, it might be possible to arrive at a situation that is macro-stable, but micro-unstable; in other words, to keep prices within a relatively broad range of $22-28/bbl."
Giannesini said last year's overheated crude prices will, ironically, prove a stabilizing force in the coming months by cooling demand.
He said global economic growth is expected to be moderate in 2001-02, citing International Energy Agency data that forecast a 2.5% growth in oil demand. "This is primarily because the eventual effect of high crude prices is to have a moderating effect."
Giannesini suggested the price-demand "acceptability threshold" was crossed when crude hit record highs in the summer, leading consumers, albeit briefly, "to modify their habits" and governments to revive energy-saving policies as inflation reared its head and economic growth slowed, especially in developing countries.
OPEC member states' willingness to "close ranks" and more tightly comply with consensual quota policy last year, Giannesini believes, is a landmark in the organization's internal relations that should pay further dividends globally in terms of price stability.
"The united front presented [by OPEC countries] marked a major success for the organization," he said. "If, in the months to come, OPEC obtains the same success in controlling prices and manages to keep them within its price band, it will be an event of major political and economic importance."
Giannesini compared the potential for such unification by OPEC states to the 1928 Achnacarry agreement that "paved the way for over 40 years of [oil] price stability."
Western oil companies' large international E&P spending programs slated before the 1998 oil price crash also will steady crude prices in the coming years with new streams of production.
"The large investments made in 1997 and 1998 [into exploration and production] should begin to bear fruit," he said. "Non-OPEC production, having stagnated for several years, is expected to start growing again. Last year, we noted the positive effects of offshore development in the Gulf of Mexico. In 2001, the first giant fields discovered in great water depths off West Africa should come on stream. Such an increase in non-OPEC production would incontestably contribute to stabilization by giving OPEC leeway to maneuver," he said.
Giannesini warned, however, that the price of oil, having suffered the volatility of the past year, could easily be affected by several outstanding factors.
He said oil companies' use of "just-in- time" inventory practices increases price instability. He said the time lag between producing countries' response to price trends-"characterized by great inertia"- and that of the crude market, where "reactions occur immediately," would continue to undermine stability.
Early last year, IFP predicted an oil "price shock" would occur in 2002 due to a lack of crude production capacity. Giannesini said that may have been short-circuited by the price volatility of 2000, leading to two favorable outcomes.
"Demand could slacken due to price elasticity and slower economic growth," he said. "And OPEC countries could decide to boost capital expenditures to expand production capacity.
"Ultimately, if the biggest producers were to plow a substantial part of the surplus earnings generated by the large price hikes of the summer 2000 back into production capacity, and if a solution could found to the problem with Iraq, the threat [of price instability] would be greatly reduced."
North Sea shutdowns
Extreme winter weather conditions across the Norwegian and UK sectors of the North Sea disrupted production last week, forcing Norsk Hydro AS, Statoil AS, Shell Exploration & Production PLC, Norske Shell AS, and other operators to reduce or shut in flows from platforms.
Norway's Norsk Hydro said production from its Snorre and Vigdis fields had to be "cut to a minimum" Feb. 5 as a result of frost problems on Statoil's Statfjord A platform, which receives output from the two fields for processing.
The Snorre tension leg platform-and the Vigdis subsea installation tied back to Snorre-were together producing 45,000 b/d to Statoil's Gullfaks C platform instead of to Statfjord A, a Hydro spokesman said. That was down from an average combined total of 250,000 b/d, consisting of 170,000 b/d from Snorre, and 80,000 b/d from Vigdis.
On Snorre, two drilling rigs-the West Alpha and Bideford Dolphin-were idled due to snow and ice, according to Hydro. Routine checks were being carried out "to ensure all safety systems are functioning effectively."
A drastic production slowdown at its Oseberg field center, where "persistent frost problems" slashed output to 50,000 b/d from 200,000 b/d, was compounded Feb. 6 by the fact that the wet gas facility at the onshore Sture oil terminal, which receives Oseberg production, was closed by the deep freeze.
Hydro said production from its Oseberg Øst platform-affected by the slowdown at the field center-was back up to 70,000 b/d last week, some 100,000 bbl of output having been lost since Feb. 3. At the Norwegian operator's Njord field, where production is usually 75,000 b/d, output was cut to 7,000 b/d because the installation's gas compressors "cannot function properly." At Hydro's Troll B platform, production was 137,000 b/d, down from 195,000 b/d on Feb. 3.
Gas transportation was also affected by the cold, said Hydro, with exports from the Oseberg D unit via the Heimdal riser platform shut down late Feb. 4 because of "problems operating valves on the gas pipeline at Heimdal." Hydro could not say when gas exports-normally 5-7 million cu m/day-would resume.
So far, a Hydro spokesman said, "as a ballpark figure," the operator has lost some 600,000 bbl of production due to the weather-related slowdowns.
Statoil AS, meanwhile, said only one of its nine main offshore developments, Yme field, fell prey to the freezing conditions.
"We were able to cope with the various problems [presented by the adverse weather] until Sunday [Feb. 4], when we had some problems due to ice on a pipe and had to shut in Yme," said Statoil spokesman Kristofer Hetland.
Yme is the smallest field in the company's Norwegian portfolio, producing only 10,000 b/d.
Hetland said Statoil had been able to prevent some "minor problems related to the freeze" at its 200,000 b/d Mongstad refinery near Bergen by manning up over the preceding weekend.
Norske Shell said it had not yet succeeded in bringing Draugen field back on flow after processing equipment succumbed to temperatures as low as -46
Across the North Sea, UK operator Shell Exploration & Production last week brought giant Brent field back on stream and up to full production of 64,000 b/d after blizzards disrupted output over the preceding weekend.
Gas price outlook
The surge in production that is following the boom in gas drilling in the US could take the edge off natural gas prices, according to EEA.
"With continued increase in productive capacity, gas prices could decline substantially and recouple with residual oil prices by early summer,'' said EEA Director Kevin Petak.
He said it's necessary to look at production trends across a wide range of companies to see the impact of increased drilling.
"While gas production for the top 10 US producers, which accounts for about 30% of all US production, appears to have declined from late 1999 through late 2000, on average, independents and smaller producers are showing significant increases in gas production,'' Petak said. "And total year-over-year production is actually higher.''
EEA said prices have moderated because price-sensitive customers did not take gas in December, and the economy has slowed. It said weather during the next 2 months will be one of the critical drivers of gas prices for the remainder of this year.
"Much colder than normal weather for the remainder of this winter could push gas prices up in February and March and further deplete storage, creating the need for more storage refill that would keep prices high throughout the year. There are still 2 months of winter left, and US gas storage is currently about 1.1 tcf, which is uncomfortably low, given the tightness of gas supply and demand,'' Petak said. "In any case, with continuation of high drilling activity, productive capacity will continue to rise this year.''
