Easing of war jitters in the Middle East stemming from Iraq's takeover of Kuwait has sent oil prices tumbling to their lowest levels in almost 2 months.
Encouraged by a conciliatory suggestion from the Saudi defense minister, later retracted, that Kuwait should consider ceding territory to Iraq after a troop withdrawal, futures prices plunged.
But as King Fahd made it clear the Saudis were not softening their stance on unconditional withdrawal, and the U.S., France, and the U.K. gave similar indications, prices hardened again.
Another factor in the rebound of prices was worsening tension in Israel as the government took a hard line stance in response to growing Palestinian unrest.
That has raised concerns of broader Arab support for Iraqi President Saddam Hussein, who has tried to link Israel's occupation of Arab territory to his seizure of Kuwait.
PRICE MOVEMENTS
Brent blend for 15 day delivery fell to $26.70/bbl at closing Oct. 23, down almost $8 on the week.
Dubai in the same span plunged to $23.50/bbl from $30.10/bbl.
In the U.S., New York Mercantile Exchange light sweet crude futures for the last day of November delivery closed Oct. 22 at $28.38/bbl, compared with prices that twice topped $40/bbl the previous 2 weeks.
After the hardened stance by the anti-Iraq coalition, Brent for 15 day delivery rebounded to close Oct. 24 at $30-45/bbl, and Dubai jumped back to $27.45/bbl. Nymex light sweet crude for December delivery closed Oct. 24 at $31/bbl.
Despite volatility in crude markets, European product prices last week continued an overall downward trend, setting off further cuts in European retail gasoline prices.
In a week to week comparison as of Oct. 24, premium gasoline in European markets fell to $320/metric ton from $370/ton, gas oil dropped to $256/metric ton from $311/ton, and heavy fuel oil slipped to $126/ton from $131/ton.
MARKET FORCES
The latter rise in oil prices was a direct reflection of uncompromising political attitudes rather than a deterioration in market fundamentals.
On the contrary, it is becoming increasing clear that supplies lost by the embargo of exports from Iraq and Kuwait have now been almost entirely made up from other sources.
Markets also noted the effect of the embargo on Iraq's refining industry. Gasoline rationing started in Iraq last week because the country's 320,000 b/d of refining capacity cannot get sufficient chemicals and additives from normal suppliers.
Iraq's oil minister, Isam al-Chalabi, said rationing was designed to extend the nation's stocks of chemicals and additives.
He added Iraq is currently producing about 350,000-400,000 b/d of crude to meet domestic demand.
IEA VIEWS
International Energy Agency estimated members of the Organization of Petroleum Exporting Countries could add another 1 million b/d of surge production within the next couple months to the 3.5 million b/d of incremental output brought on stream since Iraq's Aug. 2 blitzkrieg of Kuwait.
George Quincey Lumsden Jr., IEA's director of oil market developments, said the Persian Gulf crisis still presents an ominous situation and it is possible events not linked directly to the crisis could worsen the situation the crisis had created.
War is not the only threat, he said.
Extremely cold winter weather or a serious industrial accident could under current conditions spur IEA governments to take coordinated stockdraw and demand restraint measures.
PRODUCTION ESTIMATES
Middle East Economic Survey (MEES) upgraded its estimate of September OPEC production to 22.7 million b/d from 22.49 million b/d as a result of higher output from Iran and the United Arab Emirates.
Iranian output increased to 3.471 million b/d in September, the highest monthly level since the revolution in 1978-79. Exports rose by 282,000 b/d to 2.721 million b/d.
MEES said this high level was not sustained in the first half of October. Market sources noted Iran may be hard pressed to maintain these high levels over a long period.
Significantly, there was a substantial increase in Iranian light production in September, according to MEES data. Production of the easy to sell grade increased by almost 200,000 b/d to 1.231 million b/d.
Output of Iranian heavy also increased, by more than 100,000 b/d to 1.395 million b/d, bringing total onshore production to 2.626 million b/d. Offshore production declined slightly to 95,000 b/d from 117,000 b/d.
Production from the U.A.E. has increased and could go slightly higher before yearend.
Estimates of September U.A.E. output have been revised to 2.215 million b/d. U.A.E. flow is expected to hit 2.24 million b/d this month and 2.275 million b/d in November. All the increased production has come from Abu Dhabi. Output from the other U.A.E. producers, Dubai and Sharjah, has remained constant at 425,000 b/d.
BUOYANT SAUDI FLOW
Industry sources say Saudi Arabia consistently has produced 7.8 million b/d in October, and they expect production to reach a sustainable 8 million b/d next month.
Sustainable Saudi output could rise to 8.5 million b/d in early 1991, according to MEES. This would be achieved through a program of demothballing and debottlenecking facilities.
MEES said the work is being carried out within the framework of established plans, without any special acceleration.
The extra output would be on a sustainable, not surge production, basis.
Markets are also anxious about the quality of additional production by OPEC countries.
MEES said some of the increment beyond 7.8 million b/d will be Arabian light from the Ghawar-Abqaiq complex.
Saudi Aramco's master gas gathering and treatment system can handle associated gas from crude production of as much as 8.5 million b/d.
If production exceeds this level, Aramco would have to expand its natural gas processing capacity or resort to flaring.
10 MILLION B/D BY 1992?
Reports that Saudi Aramco plans to accelerate the program to expand sustainable production to 10 million b/d by 1992 from its original 1995 target are dismissed by industry sources.
Customers for Saudi crude are skeptical about the Saudis' ability to achieve the acceleration in the program required to meet a 1992 deadline.
They are not convinced it would be good business for the Saudis because higher prices resulting from the present crisis could depress medium term demand for oil and leave Aramco with expensive and underutilized facilities.
No decision has been made about schedules for expanding production.
However, MEES reported Aramco Pres. Ali Naimi recently flew to the U.S. for talks with Aramco partners and main management contractors ABB Lummus Crest, Fluor Daniel, and Ralph M. Parsons about the program.
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