Robert J. Beck
Economics Editor
World crude oil production slipped 0.9% in 1991 to average 59.964 million b/d.
Production declines related to war damage in Kuwait, United Nations sanctions on exports from Iraq, and oil sector woes in the crumbling U.S.S.R. were almost offset by higher production from other members of the Organization of Petroleum Exporting Countries.
OPEC crude production rose 0.6% in 1991 to average 23.425 million b/d, and non-OPEC output fell 1.9% to average 36.539 million b/d in 1991. Excluding the U.S.S.R., non-OPEC production moved up 1.5% to average 26.239 million b/d.
World demand inched up about 200,000 b/d, estimates International Energy Agency, and IEA data show about 300,000 b/d was added to stocks in 1991.
World crude prices started 1991 at their highest level, then fell off to average $17.82/bbl, down 16.5% from 1990 levels.
Meantime, a slight increase in demand is predicted for 1992, and price stability again hinges on OPEC's ability to limit production.
OPEC PRODUCTION
OPEC crude production in 1991 was the highest level since 1980 when it averaged 26.841 million b/d (Table 1).
Average annual OPEC production peaked at 30.825 million b/d in 1979.
Destruction of Kuwait production capacity in the Persian Gulf war and the continued embargo on Iraq oil exports have slashed OPEC capacity from preconflict levels. Even considering expanded capacity in Saudi Arabia and elsewhere, OPEC sustainable capacity fell to about 24 million b/d from 28-29 million b/d prior to the conflict.
OPEC production was 39.1% of the world total in 1991 vs. 38.5% in 1990. In the 1970s, OPEC output was more than 50% of world total, but increased non-OPEC production and declining world demand reduced OPEC's share to 29.9% in 1985.
Wild wells caused by Iraqi sabotage were controlled last fall, but Kuwait's prewar production of 1.5 million b/d isn't expected to be regained before yearend 1992. Kuwait production averaged only 136,000 b/d in 1991 vs. 1.062 million b/d in 1990-a level reduced in the wake of Iraq's invasion in August 1990. Kuwaiti production in 1989 averaged 1.585 million b/d.
The embargo slashed Iraq's production to an average of 283,000 b/d in 1991 from 2.038 million b/d in 1990 and 2.897 million b/d in 1989. Combined production from Iraq, Kuwait, and the Neutral Zone fell 2.857 million b/d in 1991 to an average 555,000 b/d.
To make up for those losses to the market, the other 11 OPEC members boosted 1991 production 15% to 22.87 million b/d. The largest increase came from Saudi Arabia where production increased 29.5% to an average 8.158 million b/d.
The sharp jump in Saudi production surprised many. Prior to the conflict their sustainable capacity had been estimated at only 7 million b/d.
OPEC QUOTA
OPEC has adopted a new quota it hopes will balance supply and demand in second quarter 1992.
The new quota calls for maximum OPEC production of 22.982 million b/d, including 812,000 b/d for Kuwait and 505,000 b/d for Iraq. However, Saudi Arabia agreed only to cut production to 8 million b/d. If it adheres to that level the OPEC ceiling would move up to 23.095 million b/d.
OPEC has had problems with getting quota compliance from all members, particularly the U.A.E. Analysts see little prospect OPEC will trim production enough to boost prices to its $21/bbl target.
Throughout most of 1991 OPEC was not concerned about adhering to quotas because the world supply/demand balance enabled OPEC to produce at close to capacity. The need for a new quota agreement surfaced toward yearend when crude prices began to fall as demand slipped amid ample world supplies.
The anticipated seasonal slump in consumption in second quarter 1992 has reduced refiners' demand for crude. With most member countries producing close to capacity and some additional production being added in Kuwait, current total OPEC production is greater than the projected second quarter demand for OPEC oil.
NON-OPEC PRODUCTION
Non-OPEC crude production fell 1.9% in 1991 to 36.539 million b/d. Production from non-OPEC countries accounted for 60.9% of the world total vs. 61.5% in 1990.
The decline was led by a sharp drop in production from the former U.S.S.R., down by 1. 09 million b/d to 10.3 million b/d. Production fell to as low as 9.773 million b/d in December. That follows a drop of 750,000 b/d in 1990 to 11.39 million b/d and compares with the peak in 1987 of 12.48 million b/d. Production in other non-OPEC countries outside rose 1.3% in 1991 to 26.239 million b/d. Non-OPEC share of total world production increased to 43.7% from 42.7% in 1990. Fourteen countries posted production gains of 10,000 b/d or more in 1991 (Table 2). U.S. production posted its first annual gain since 1985. Offsetting these increases were declines in several countries. Nine non-OPEC countries other than the U.S.S.R. posted declines of 10,000 b/d or more.
WORLD SUPPLY
IEA estimated 1991 total world liquids supply of 66.7 million b/d. Total supply includes production of crude oil, condensate, and natural gas liquids plus processing gain.
Reduced OPEC capacity caused concern about adequate crude supplies during the winter heating season, and stocks were increased early in the year. Non-OPEC supply of crude, condensate, and NGL fell 500,000 b/d in 1991 to an average 41.3 million b/d due to the sharp drop in U.S.S.R. production.
The decline was partially offset by production increases posted in other non-OPEC countries. IEA data show total OPEC liquids supply in 1991 up about 250,000 b/d to 25.4 million b/d.
The total supply in 1991 was above the 66.4 million b/d estimated for total demand, leaving an estimated increase in worldwide stocks averaging 300,000 b/d. This translates into an increase in total world stocks by about 110 million bbl in 1991. By comparison, IEA estimates the rate of stock-building in 1990 at 700,000 b/d, the equivalent of adding about 256 million bbl to worldwide stock levels for the year. According to IEA, onshore OECD stocks were the same Jan. 1, 1992, as a year earlier, 3.44 billion bbl. This compares with 3.35 billion bbl at the start of 1990 and 3.3 billion bbl at the start of 1989. Stock levels have been moving up faster than consumption.
OECD demand in 1991 was up only 1.3% from the 1988 demand level. In days of forward consumption, total stocks moved up to 97 days at the start of 1991 and 1992 from only 92 days at the start of 1989 and close to the peak of 100 days in 1983.
Much of the increase in stock levels in recent years has been in government held stocks. Company stocks have tended to reflect demand levels and the cost of holding the stocks.
Public stocks remained at 139 million bbl in 1991, up from 136 million bbl in 1990.
Public stocks were only 52 million bbl at the start of 1981. Company stocks were 330 million bbl at the start of 1992 vs. 320 million bbl in 1990 and 429 million bbl in 1981.
WORLD DEMAND
IEA figures show world oil demand rose only marginally in 1991 because of U.S. recession and slowdown in European economic growth.
Demand averaged 66.4 million b/d, up from 66.2 million b/d in 1990.
Petroleum product demand for the group of industrial countries included in the Organization for Economic Cooperation and Development remained flat compared with 1990 at 38 million b/d. OECD demand was 37.8 million b/d in 1989 and 37.5 million b/d in 1988. Demand in OECD countries of North America fell 400,000 b/d to average 18.5 million b/d for 1991.
The U.S. Energy Information Administration estimates 1991 U.S. petroleum product demand at 16.634 million b/d, down 2.1% from 1990. The decline was mainly due to the recession and milder weather in the first quarter
Demand in OECD Europe moved up 300,000 b/d in 1991-to 13.3 million b/d, which IEA attributes to colder weather in the first and fourth quarters 1991 and occurred despite the economic slowdown there.
OECD Pacific area posted an increase in demand of 100,000 b/d. Oil demand grew strongly in first half 1991 due to strong economic growth in Japan but slowed in second half as economic activity in Japan slowed.
Total demand for petroleum among non-OECD countries moved up in 1991 and accounted for all the growth in world oil demand.
Demand in China increased 100,000 b/d to 2.4 million b/d. Among other non-OECD Asian nations, demand jumped 300,000 b/d to 5.6 million b/d.
Demand increases of 100,000 b/d were posted in Latin America, to 5.2 million b/d, and Africa, to 2.2 million b/d. Middle East demand remained at the 1990 level of 3.3 million b/d.
But, according to IEA estimates, demand fell 400,000 b/d in eastern Europe and the former U.S.S.R. Demand in the U.S.S.R. fell 100,000 b/d to average 8.3 million b/d in 1991. Demand in other East European countries fell to 1.4 million b/d from 1.7 million b/d in 1990.
PRICES
Crude prices were relatively stable in 1991 and were not a major factor in determining the change in oil demand. The week of January 4, 1991, the average price for world export crude was $24.24/bbl.
Immediately following the Persian Gulf war the price of crude fell to a 1991 low of $15.34/bbl the week of Mar. 1, 1991. The price remained relatively stable for the next several months before moving up in September and October as refiners began increasing stocks to meet winter demand. In the first seven weeks of 1992, the average price of world export crude oil was $16.40/bbl, and the average for the OPEC basket of seven crudes was $17.34/bbl, 17.4% below the target price.
OUTLOOK FOR 1992
IEA projects a modest increase in world demand for oil in 1992.
Total world demand is expected to move up 400,000 b/d to 66.8 million b/d. A sharp drop in consumption in the former U.S.S.R. is expected to be more than offset by increases in the industrial OECD countries and certain developing countries where economic growth is strong.
OECD demand is expected to rise 300,000-400,000 b/d, mainly due to an increase in North America. OECD Europe demand is expected to remain constant, and OECD Pacific demand is projected to climb 100,000 b/d.
Demand in the non-OECD countries is projected to remain at the same level as in 1991, 28.5 million b/d. Demand in the former U.S.S.R. is projected to fall 600,000 b/d to 7.7 million b/d, and demand in eastern Europe will be. down another 100,000 b/d in 1992. Demand in China is projected to rise 100,000 b/d. Demand in the other Asian developing countries is projected to jump sharply, increasing 400,000 b/d to 6 million b/d. Demand in Latin America is projected to increase 200,000 b/d.
IEA predicts total non-OPEC supply will fall 500,000 b/d to an average 40.8 million b/d for 1992. Supply from the former U.S.S.R. is expected to be down 900,000 b/d at 9.5 million b/d, partly offset by increased liquids production in other non-OPEC countries.
Total demand for OPEC oil will depend upon shifts in the level of stocks. Assuming no net change in the stock level, demand for OPEC liquids will average 26 million b/d for 1992, up 2.4% from 1991. This includes 2 million b/d of OPEC NGL production.
If stocks are drawn down in 1992 at 1991's rate of increase, demand for OPEC crude oil would fall to 23.7 million b/d. In either case, there will be a modest increase in demand for OPEC crude oil in 1992, about 300,000-600,000 b/d.
The expected 1992 demand for OPEC oil is very close to current OPEC production. This would appear to indicate a potentially stable market in 1992.
However, the problem facing OPEC is how to accommodate increasing production from Kuwait and potential production from Iraq. Sizable hikes from those two without corresponding cuts by other members could result in excess production and downward pressure on prices.
In 1992 demand for OPEC oil will be lowest in the second quarter. Depending on treatment of stock levels, demand for OPEC oil will drop to around 22.8-23.2 million b/d, down from 24.1 million b/d in fourth quarter 1991, consistent with OPEC's new quota level of 22.982 million b/d. If OPEC can successfully rein output to this level, it should help balance the market and thus stabilize prices.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
