Oil price forecasters are running the other way these days, as peace overtures grow more pronounced in the Middle East.
In recent months, oil price forecasts were generally dominated by the view that war was the most likely outcome of Iraq's blitz of Kuwait, resulting in expectations of price spurts to $50-80/bbl. Even more sanguine predictions took note of a war premium that seemed permanently emplaced in oil prices as the stalemate dragged on, calling for a $30/bbl floor. However, sluggish demand stemming from higher prices, weakening economies, and a mild winter has coupled with surprising resilience in OPEC production to have industry observers fretting over an oil price collapse in 1991 (see editorial, p. 17).
As if to presage that expectation, oil prices have plunged to their lowest level since the first full week of the Persian Gulf crisis. Nymex crude for January delivery closed Dec. 12 at $25.35/bbl, down about $2 on the week and the lowest closing since Aug. 5 at $24.49. Products prices continue to show softness, led by Nymex gasoline dropping another 3 on the day and almost 6 on the week to close at 64.49/gal, the lowest since the day before Iraq invaded Kuwait.
IEA has slashed its estimate of fourth quarter oil demand among market economies by 1.2 million b/d vs. its precrisis estimate. The agency also put non-OPEC oil supplies at 200,000 b/d higher. That pares the call on OPEC oil by about 1.4 million b/d, assuming a 500,000 b/d stockdraw, IEA says. At the same time, OPEC output outside Iraq and Kuwait jumped 3.9 million b/d, broken out as Saudi Arabia 2.6 million b/d, Venezuela 400,000 b/d, U.A.E. 300,000 b/d, Libya 300,000 b/d, Nigeria 200,000 b/d, and Iran 200,000 b/d.
Smith Barney sliced its forecast for WTI in 1992 by $5 to $20/bbl because of the prospect of Iraqi and possibly Kuwaiti exports coming back into the market. The analyst sees a resumption in world oil demand growth being pushed out a year or 2. For 1991, Smith Barney estimates world oil demand will drop 800,000 b/d, which would be offset entirely by a drop in Soviet oil production. That would mean a balanced market if not for the risk of OPEC being unable to control oil supplies once the crisis is resolved, which would slash prices to $18-22/bbl.
Purvin & Gertz pegs world oil demand this month at 53.8 million b/d, down 1.1%, from 1989 levels. It sees a fourth quarter stockbuild of more than 500,000 b/d, largely because some OPEC producers are having difficulty selling all production, especially heavier crudes. Although much of the stockbuild is voluntary for strategic reasons, it still weakens the market, P&G notes.
Pointing to the direction of oil prices after the Persian Gulf crisis ends, Salomon Bros. cites the extreme backwardation that prevails in the crude futures market. Oil for delivery in January 1992 is priced $6 below January 1991 delivery oil.
Salomon suggests recent diplomatic activity involving the U.S. and Iraq points to a new geopolitical order for the Persian Gulf with profound implications for the oil industry:
"A sort of 'Middle Eastern NATO' is a conceivable security arrangement in which U.S., European, Soviet, and Japanese partners might guarantee the external security of regional treaty partners (Gulf Cooperation Council, Egypt, and Jordan, for example)."
Salomon thinks this order could pave the way for more crude exporters' investments in consumers' downstream industries and consuming countries might become equity investors in crude exporting nations' domestic oil and gas E&D.
"Such arrangements would provide steady markets for oil and steadfast oil suppliers, reduce oil's recent (very unwelcome) price volatility, and provide sufficient investment capital to develop the world's largest reserves of petroleum with little or no political event risk."
There is still more Saudi productive capacity in the offing. Saudi Aramco let a 5 year service contract to John Brown for project management of Hawtah field development in central Saudi Arabia, where Aramco recently made some significant discoveries of superlight crude. Brown will begin work this month on engineering and construction management covering a gas/oil separation plant, a 350 km pipeline, and field infrastructure facilities.
Saudi Arabia intends to accelerate plans to expand productive capacity to 10 million b/d, says Centre for Global Energy Studies, a London think tank headed by former Saudi Oil Minister Yamani. The target is now 1992 vs. 1995 planned earlier.
More western companies pursue entry in eastern Europe's downs ream markets (see Watching the World, p. 25). Total has formed a joint venture with two Hungarian oil companies to build and operate a chain of 40 gasoline stations in Hungary under Total's logo. The first station was opened at Keeskemet, 40 miles south of Budapest, in October. Total's partners are Afor, the former state distribution company, and Mineralimpex responsible for import and export of crude and products.
Elf plans a May start for what it says is the first exploration work by a western oil company in the Soviet Union. That will entail seismic work on two tracts in the western Kazakhstan area of the U.S.S.R. in May, says Maurice Mallet, responsible for the company's relations with eastern Europe. He told the French trade publication Bulletin de l'Industrie Petroliere that seismic should begin simultaneously in both areas. Elf and the Soviets signed a final production sharing agreement last May, but some technical details still need to be negotiated, he said.
A rare and sizable oil discovery brightens prospects off the Philippines. Vaalco Energy Inc., Houston, reports subsidiary Alcorn (Production) Philippines Inc. 1 West Linapacan flowed on drillstem test 5, 198 b/d of 32. 2 gravity oil through 48/64 in. choke with surface flowing pressure of 585 psi from pay at 5,830-50 ft. Gas-oil ratio is 180 cf/bbl. Two more DSTs are planned for the well, in 1,142 ft of water off Palawan Island (OGJ, Nov. 5, p. 31).
Phillips has hiked capital spending to $1.5 billion in 1991 from $1.3 billion in 1990. Both figures exclude outlays to rebuild its Pasadena, Tex., polyethylene plant, damaged in an Oct. 30, 1989, blast. About half the budget is earmarked for upstream, up about 13%, and heavily concentrated in North Sea EOR and field development. A big jump is planned in gas and gas liquids outlays, $129 million vs. $74 million in 1990--with almost all of the increase for payments on two LNG tankers to serve its LNG contracts with Japanese utilities. Phillips jumped its downstream budget almost 27% to $630 million, mostly for projects under way. The company hiked planned environmental outlays to $166 million from $101 million in 1990.
Conoco will form a citizen watchdog group to provide environmental advice on its operations in the Gulf of Mexico, akin to such groups it formed under a broad environmental initiative announced in April. Conoco also is mulling a $75 million oil/water separation project for Gulf of Mexico platforms to eliminate onshore separation and subsequent discharge.
A Senate antitrust subcommittee may study the relationship between crude and product prices early next year. Sen. Howard Metzenbaum (D-Ohio), subcommittee chairman, recently wrote the chairmen of the 12 largest U.S. oil companies, asking, "Why is it that gasoline prices go up instantly when crude oil costs go up, but when crude oil costs come down, your gasoline prices do not?" Metzenbaum told them they "owe the American people an answer--if not a refund or discount." He said his panel will investigate if a satisfactory answer is not forthcoming.
Energy Sec. Watkins will recommend the U.S. withdraw a "substantial" amount of oil from the Strategic Petroleum Reserve should war break out with Iraq. Watkins says crude supplies would continue to be adequate and the drawdown would be conducted to calm a jittery market and help keep prices in line. He also said the U.S. is discussing with five oil exporting countries possibly leasing their crude for the SPR--having one advantage of cutting expected surplus oil when the crisis ends.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
