Is OPEC miscalculating on demand?

March 15, 2004
Has the Organization of Petroleum Exporting Countries miscalculated? Some OPEC ministers have been hinting as much recently, suggesting that the group may have undershot estimates of the call on its crude.

Has the Organization of Petroleum Exporting Countries miscalculated? Some OPEC ministers have been hinting as much recently, suggesting that the group may have undershot estimates of the call on its crude.

Some comments made ahead of the next OPEC ministerial meeting in Vienna at the end of this month indicated the group may revisit its recent agreement to cut production quotas by 1 million b/d come Apr. 1. There is some reason to believe this could happen, as reports on accelerating demand growth may prove to be a reality check for those in OPEC still terrified of a repeat of the 1998 price collapse.

Demand factors

One of the surprising demand factors that may explain OPEC's underestimation of the call on its crude in the first quarter is the sagging US dollar.

Signs of strong demand growth are abundant despite a relatively high average oil price of $34.50/bbl in first quarter 2004 to date, according to Merrill Lynch analyst Steven Pfeifer. And the decline in the value of the US dollar has been a major factor in what once would have been viewed as a paradox.

"The recent rise in oil prices to over $36/bbl WTI [West Texas Intermediate] has been made more palatable to global consumers, because the current cost in local currency is well below prior price spike levels," Pfeifer said in a recent research note. "Compared to the 2000 spike in oil prices (which reached a US dollar price of $37/bbl), foreign consumers are paying 25% less for crude oil today, based on a basket of international currencies."

That compares with 1999-2002, when a stronger dollar, combined with high oil prices, squelched oil demand growth to only 0.6%/year.

"Demand in 2003 rose 1.7 million b/d (2.3%) despite a higher average oil price ($31.09/bbl) than in any of the previous 4 years," Pfeifer noted. "We believe that a key reason we are not seeing the same negative global demand response as we did in 1999-2002 is the sharp decline in the value of the US dollar."

And there is little doubt that crude oil demand is accelerating. The International Energy Agency, in its Mar. 11 oil market report, cites surging demand in China and other Asian economies outside the Organization for Economic Cooperation and Development in its latest upward revision (we've lost count) to its world oil demand estimate.

IEA now sees non-OECD oil demand growing by 1 million b/d—out of 1.65 million b/d total worldwide this year. And the agency has ratcheted up its estimate of the call on OPEC crude plus stock change by 300,000 b/d to 25.8 million b/d for the year.

Supply questions

At the same time, OPEC may be overestimating growth in non-OPEC oil production this year. Gains from Russia and Iraq aren't materializing according to schedule. And further in the spirit of déjà vu, markets are getting jittery again over civil strife in Venezuela and Nigeria.

Perhaps overshadowing these factors is the tight inventory situation for both crude and products in North America; trepidation is spreading across markets watching the seasonal transition to gasoline ahead of the summer driving season. Thus market speculation piles atop higher crude costs to help push US gasoline prices to record levels—in March, no less.

Not everyone agrees with the view that the market balance is tightening. Jacques Rousseau, an analyst with Arlington, Va.-based Friedman Billings Ramsey Co. Inc., disputes IEA's contention that OECD stocks fell by 690,000 b/d in January and claims that in fact global supply likely exceeded demand in the period and that the inventory balances will be adjusted in future reports to reflect that.

"We maintain our view that global inventories of crude oil and refined products are now at their highest level since 1999, and that they should continue rising thoughout most of 2004," he said.

Further, while Rousseau acknowledges the likelihood of a strong year for demand, "it still would not be enough, in our view, to prevent supply from exceeding demand unless OPEC actually reduces production to their new quota of 23.5 million b/d (OPEC's February production was 25.85 million b/d, according to the EIA)."

OPEC may be waiting for irrefutable evidence that proves otherwise before stepping off its current path—perhaps the kind of evidence only hindsight provides.

(Author's e-mail: [email protected])

OGJ HOTLINE MARKET PULSE

Latest Prices as of Mar. 15, 2004

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

NOTE: Because of holidays, lack of data availability, or rescheduling of chart publication, prices shown may not always reflect the immediate preceding 5 days.

*Futures price, next month delivery. #Spot price.