THE OIL MARKET'S NEXT FEW MONTHS

The oil market drifted through 1990's first quarter as though under a spell. Spot and futures prices fell $3-4/bbl. But forecasts remain optimistic. A consensus seems to have formed that oil prices look strong in the near term--except for the next few months. It's time to test the disclaimer. The next few months begin this week.

April 2, 1990

3 min read

It's time to test the disclaimer. The next few months begin this week.

One hopeful sign came in March from the Organization of Petroleum Exporting Countries. Iraq led pressure on a monitoring committee for a price hike. In the past, politics might have prevailed. But the committee, appropriately wary of a second quarter demand slump, delayed action until a full ministerial meeting May 25.

SECOND QUARTER WORRIES

There are good reasons for OPEC and the rest of the petroleum industry to worry about this customarily troublesome quarter. Oil demand growth outside the centrally planned economies (CPE) is lagging expectations. The International Energy Agency at the end of February trimmed 200,000 b/d from its January estimate of first quarter demand. The move probably reflects weakness in the U.S., where product deliveries so far this year have been 400,000 b/d less than their 1989 levels. The new IEA estimate for non-CPE demand in the first quarter is 53.7 million b/d. The agency projects demand for all of 1990 at 52.9 million b/d, up 900,000 b/d from 1989 but 100,000 b/d less than the previous estimate.

OPEC planners think demand is understated. Indeed, some consumption, especially in developing countries, might not show up in the numbers. Coming from a group chronically unable to keep production within its self-imposed quota, however, assumptions about undetected demand look suspiciously convenient.

Furthermore, an out-of-season first quarter stock build makes those assumptions look simply suspicious. IEA's figures imply a stock gain of 200,000 b/d. During the first quarters of each of the previous 4 years, there were stock withdrawals averaging no less than 1.7 million b/d and as much as 3.8 million b/d. And this year's first quarter increase can't be dismissed as rebuilding in the wake of a drawdown. It followed three straight quarterly increases and an average gain of 300,000 b/d for all of 1989. At least some of OPEC's phantom market strength, therefore, reflects early crude purchases for inventory-purchases that can't continue indefinitely.

The unusual stock build wasn't enough to prevent a first quarter price slide and probably signals further price weakness. Even if the second quarter ends without the net first-half stock withdrawal characteristic of the past 4 years, demand for OPEC crude this quarter will fall to 19.9 million b/d--below both current production and the group's total quota. That means OPEC members must cut output when necessary, and the market in general must prepare for a bumpy few months.

WHAT COMES NEXT?

After that, things look better. Of course, things always look better after the second quarter. If stocks keep climbing and demand doesn't regain strength, the third and fourth quarters might sprout question marks. But OPEC's production capacity surplus is shrinking, output is plummeting in the U.S. and sputtering in the Soviet Union, and Asian demand is zooming. It's generally for those reasons that analysts in growing numbers foresee price strengthening fairly soon.

Development of that consensus might be as good a reason as any to fret. Still, prices do look strong, except for the next few months. OPEC and oil companies must not ignore demand and stock trends of the next few weeks. They will determine how long the hazardous next few months might last.