Robert J. Beck
Economics Editor
Excess production and production capacity reasserted their influence in worldwide petroleum markets last year, pushing crude oil prices to their lowest levels since before the Persian Gulf crisis.
The development ended the relative price stability that has characterized the period since the crisis ended in January 1991. One of the major questions now being asked is whether there has been a downward shift in the seasonal range of crude prices.
Until the second half of last year, prices in the past several years had fluctuated seasonally within the $16-20/bbl range for the weekly average of world export crude oils. The annual average was slightly below $18/bbl.
Some analysts have concluded that this band has fallen to $12 16/bbl.
A bright spot this year is worldwide demand, which should increase as member countries of the Organisation for Economic Cooperation and Development recover from recession and the U.S. economy continues to grow.
Developments in the Commonwealth of Independent States will remain a crucial variable in the market during 1994. The region's transition to a new economic system has been difficult. Production is falling, but low internal consumption has enabled the C.I.S. to keep exports at robust levels.
A crucial change in the market has been production capacity of members of the Organization of Petroleum Exporting Countries relative to world demand. With demand stagnant and significant volumes of production coming on stream outside the exporters' group, the call on OPEC crude has not kept pace with capacity growth. The group thus must produce at less than capacity levels or allow prices to collapse as they did in 1986.
In the near future, OPEC's degree of success in balancing the market will be a key to prices. Another is politics in the Middle East. If it were not for a United Nations embargo, the market would have another 2 3 million b/d of oil supply from Iraq.
WORLDWIDE DEMAND
A decline in worldwide demand for petroleum products was a major reason prices weakened toward the end of the 1993.
Economic problems in the C.I.S., Europe, and Japan offset oil demand gains in the growth economies of Asia Pacific, Latin America, the Middle East, and North America.
Germany, France, and Japan were in recession in 1993. The largest drop in demand came in the economically struggling C.I.S.
Improved economic activity in the OECD is expected this year as Japan, Germany and France recover and the U.S. economy gathers momentum. Demand for petroleum products will recover as well.
Demand in the C.I.S. is expected to continue to slide, but the drop will not be as great this year. Demand growth will continue in non OECD Asia, Latin America, and the Middle East.
The International Energy Agency (IEA) projects an increase in world demand of 800,000 b/d in 1994 to 67.7 million b/d. The projection includes a 500,000 b/d increase in OECD demand to 39.5 million b/d and a gain of the same size in non OECD demand outside the C.I.S. to 23.1 million b/d.
These increases will be partially offset by a 500,000 b/d decline in C.I.S. demand to 5.1 million b/d.
Worldwide demand last year fell 200,000 b/d to 66.9 million b/d. This was entirely due to 1.3 million b/d drop in C.I.S. demand to 5.6 million b/d. OECD demand increased by 100,000 b/d to 39 million b/d, and non-OECD demand excluding the C.I.S. increased 1 million b/d to 22.3 million b/d.
This year petroleum demand in the OECD countries is expected to move up 1.3% to 39.5 million b/d. Most of the growth will be in North America - 1.6% to 19.5 million b/d. European demand will average 13.7 million b/d, up 0.7%. Demand in OECD Asia is expected to remain at 6.3 million b/d.
Last year demand in OECD Europe fell due to recession in several countries. This was offset by recovery in North America, where petroleum demand moved up an estimated 300,000 b/d. Asian OECD demand held steady.
ECONOMIC TRENDS
According to estimates by the International Monetary Fund (IMF), 1993 real gross domestic product (GDP) fell 1.617, in Germany, 1% in France, and 0.1 % in Japan. This was offset primarily by GDP gains of 2.7% in the U.S. and 2.6% in Canada. Total OECD economic growth for 1993 was estimated by the IMF at 1.1%.
The IMF projects economic recovery in 1994 for OECD countries that were in recession last year and more rapid growth for most of the others: 1.2% for Germany,, 1.1% for France, 2% for Japan, 2.6% for the U.S., and 3.8% for Canada. For all of the OECD the IMF expects economic growth of 2.2% in 1994.
Of the large gain in non OECD petroleum demand outside of the C.I.S., most will come from Asian developing countries, where petroleum consumption is expected to move up 4.4% to 7.1 million b/d. Latin American demand is expected to move up to 5.7 million b/d, Middle Eastern demand to 3.9 million b/d.
Demand in China is expected to increase 100,000 b/d to 3 million b/d. In Africa and East Europe, there will be little change from 1993 consumption levels.
Several non OECD areas posted demand gains last year: Asia 400,000 b/d to an average 6.8 million b/d, Middle East 200,000 b/d to 3.8 million b/d, Latin America 200,000 b/d to 5.7 million b/d, China 200,000 b/d to 2.9 million b/d, and Africa 100,000 b/d to 2.1 million b/d.
The IMF estimates the average economic growth rate in developing countries at 6.1% in 1993 and projects growth of 5.5% this year.
The strongest growth last year came in the developing countries of Asia - 8.7%. IMF expects growth in this area of 7.1% this year.
Economic growth for developing countries in the Western Hemisphere is estimated to have been 3.4% in 1993; growth of 3.5% is expected this year.
The IMF estimated growth in the developing countries of the Middle East and East Europe at 3.4% in 1993 and expects 4.6% growth this year. And it estimates Africa's 1993 growth at 1.6% and expects an increase to 2.6% in 1994.
The IMF estimated that economic activity in the C.I.S. fell 13.7% last year, following declines of 17.8% in 1992 and 11.8% in 1991. The rate of decline in GDP is expected to slow this year to 2.4%.
Worldwide demand petroleum moved up from 66 million b/d in 1989 to 66.4 million b/d in 1990, 66.8 million b/d in 1991, and 67.1 million b/d in 1992 before slipping to 66.9 million b/d in 1993.
The low growth rate and last year's decline were due to falling consumption in the U.S.S.R./C.I.S. Demand in that region fell from 8.8 million b/d in 1989 to 8.5 million b/d in 1990, 8.3 million b/d in 1991, 6.9 million b/d in 1992, and last year's 5.6 million b/d. Worldwide petroleum demand excluding the C.I.S. moved up from 57.2 million b/d in 1989 to 61.3 million b/d in 1993.
Among OECD members, last year's slim demand gain kept alive a series of increases. In 1992, as the U.S. economy began to recover, OECD consumption jumped by 600,000 b/d to 38.9 million b/d. Before that it had inched up from an 37.8 million b/d in 1989 to 38.1 million b/d in 1990 and 38.3 million b/d in 1991.
During 1989 91, gains in OECD Europe and the Pacific were offset by declines in North America. Consumption in North America fell from 19.3 million b/d in 1989 to 18.9 million b/d in 1990 and 18.6 million b/d in 1991 before rebounding to 18.9 million b/d in 1992 and 19.2 million b/d in 1993.
GDP for the OECD as a whole slipped from 3.3% in 1989 to 2.4% in 1990 and only 0.7% in 1991, then rose 1.5% in 1992.
SUPPLY IN 1993
OPEC production held fairly steady in 1993 as both group capacity and production elsewhere grew. As a result, the group faced increasing difficulty in meeting its members' revenue needs and still accommodating production to the world's need for its crude.
Capacity and production gains were greatest in Kuwait, which raised output to nearly 2 million b/d by mid-1993. Iran also boosted output significantly. A number of other OPEC countries have added capacity, but most have restrained production to try to balance the market.
During the past few years, declining production from the C.I.S. has enabled OPEC members to produce close to capacity despite weak worldwide demand. But in 1993 the drop in C.I.S. output wasn't enough to make up for increasing non OPEC production and the worldwide sag in consumption.
OPEC's fourth quarter quota of 24.5 million b/d proved excessive in view of static demand and inventories built up in the second and third quarters. But the roup refused to lower the politically difficult ceiling when continued price declines showed it to be excessive, which weakened prices at yearend even further.
IEA estimates OPEC crude oil production averaged 25.1 million b/d in the first quarter of 1993, 24.2 million b/d in the second quarter, and 24.7 million b/d in the third quarter. Fourth quarter OPEC output is estimated at 24.8 million b/d, which would result in average annual output of 24.8 million b/d. OPEC crude production averaged 24.1 million b/d in 1992.
SUPPLY OUTLOOK
IEA projects total non OPEC supply, including processing gain, will drop to an average 40.3 million b/d for 1994 from 40.4 million b/d in 1993.
There will be some seasonal fluctuation, with supply hitting a high in the first quarter of 40.8 million b/d and a low in the third quarter at 39.8 million b/d.
Average non OPEC total supply has fallen from 42.2 million b/d in 1990 to 41.8 million b/d in 1991, 41.1 million b/d in 1992, and 40.4 million b/d last year.
Most of the decline comes from the C.I.S. Production in the former U.S.S.R. is projected to average 7.1 million b/d for 1994, down from 7.8 million b/d in 1993.
U.S.S.R./C.I.S. output has been falling since 1989, when it averaged 12.2 million b/d. it fell to 11.5 million b/d in 1990, 10.4 million b/d in 1991, 9 million b/d in 1992, and 7.8 million b/d last year.
Non OPEC production excluding the C.I.S. is expected to climb to an average 33.2 million b/d in 1994 from 32.6 million b/d the year before. Non-OPEC output excluding the C.I.S. has increased since 1989, when it averaged 30 million b/d.
With an increase in worldwide demand in 1994 and drop in non OPEC supply, there should be slightly greater demand for OPEC oil.
Oil & Gas journal estimates that the call on OPEC crude oil and NGL will increase to an average 27.1 million b/d in 1994 from 26.9 million b/d last year. This will include 2.2 million b/d of NGL.
OGJ expects a drawdown from inventories to restrain the call on OPEC oil.
Demand for OPEC oil will depend greatly on events in the C.I.S., where consumption and production are expected to decline in 1994. If C.I.S. production falls faster than demand, exports from the region will fall raising demand for OPEC oil.
Yearend supply estimates by IEA imply a stock draw of 300 400,000 b/d in the fourth quarter. In the second and third quarters, stocks increased at an estimated rate of 1.2 million b/d. Since demand was static, there was no operational need to boost stock levels. The stock gains represent supply that can compete with OPEC crude.
OGJ projects a worldwide stock reduction of 1 million b/d during the first quarter of 1994. As a result, demand for OPEC crude oil will remain at the end 1993 level of 24.8 million b/d, even though demand has risen. Additional OPEC production would weaken prices.
Worldwide demand will fall in the second quarter, and demand for OPEC crude will slip to 23.6 million b/d. OPEC will have to set new quotas reflecting the seasonal shift in demand and any potential stock reduction or there will be further price weakness.
If additional oil is available in 1994 from Iraq or other OPEC producers there will be additional surplus and even more need for a realistic production quota to prevent a price collapse.
PRICES
Crude oil prices started to slip in the second quarter last year, when demand weakened and stocks started to rise. Prices stabilized in the third quarter as refiners stocked up in anticipation of increased winter demand. However, as it became evident that the economic weakness would extend into the fourth quarter and that winter demand would not be as robust as anticipated crude, prices fell sharply.
Crude prices had been stable since the end of the Persian Gulf conflict in January 1991. Prices fell immediately following the start of the war and fluctuated in a range of $15 20/bbl since that time.
The average price of world export crude oil started 1993 at $16.86/bbl. The price trended slowly downward over the year and was 915.66/bbl the week of Oct. 15 and then fell to $12.72/bbl by the week of Dec. 17.
The crude oil price during 1994 will depend upon a number of key factors.
The pace of the economic upswing in the U.S. and recovery in Japan and Germany will be crucial to demand, as will political and economic developments in East Europe and the C.I.S.
Production from the C.I.S. and availability of oil from currently embargoed Iraq will remain major or supply uncertainties.
Meanwhile production capacity will continue to grow within OPEC, and new production will stream outside the group.
With capacity growing, prices will depend greatly on OPEC's ability to set and adhere to realistic market clearing production quotas.
INTERNATIONAL DRILLING
International exploration and drilling activity in 1994 will depend upon expectations for crude oil prices. If OPEC restrains output and prices firm, a slight increase in activity is possible this year.
New opportunities for exploration and development have developed. Many countries with excellent production potential need investment capital and technical assistance.
Although the international national rig count has slipped in recent years, exploration and drilling have been sustained without a boost from higher oil prices. Because of technological improvements, total expenditures have not fallen as much as the active rig count.
The Baker Hughes international count of active rotary rigs outside of the U.S. and Canada averaged 775 for the first 11 months of 1993. Preceding annual averages were 857 in 1992, 909 in 1991, 907 in 1990, and 922 in 1989.
The number of active international rigs moved up toward the end of last year to 788 in October and November. That signal a reversal of the recent downtrend.
Major international oil companies are expected to continue to invest a growing share of their exploration and production budgets outside the U.S. The international rig count could move up in 1994 as companies move to take advantage of international exploration and production opportunities.
