As 1992 ends, so ends a period of unusual balance in the oil market. Since the Persian Gulf war of 1991, near-maximum output from unfettered producers has roughly matched the world's need for oil. In contrast to normal market conditions, relatively little of the available production capacity has gone idle. That will change in 1993.
The fault lines began to show late this year. In their November meeting in Geneva, ministers of the Organization of Petroleum Exporting Countries resumed their usual competition for market share. Conflicts were greatest between Iran and Saudi Arabia. The group came to shaky terms over first quarter 1993 output quotas. But an announced production cut to 24.9 million b/d for December didn't halt a price slide under way since October. If 24.9 million b/d wasn't low enough in the fourth quarter, what will it take to balance the market in the low demand second quarter of next year?
As Oil & Gas journal's Worldwide Production Report asserts, an oil producing contest seems to be taking shape for 1993 (p. 39). Non-OPEC oil producers, however, shouldn't lose hope yet.
MARKET NOT STATIC
If the market has remained in relative balance these past 2 years, it certainly hasn't been static. Production slumps in the U.S. and former Soviet Union have offset resurgent output in Kuwait and lesser growth elsewhere, keeping production worldwide steady at about 60 million b/d this year. OPEC lately has been producing an estimated 25.5 million b/d of crude, which is more than recent estimates of the group's sustainable capacity, excluding Iraq but counting 1 million b/d from Kuwait. There are several explanations for this above-capacity output, the best relating to OPEC politics.
What's important is that OPEC has been producing at or near capacity, that the rest of the world has, too, and that demand has been static due to an economic lull in the industrialized world. It has been a balance of coincidence, and it cannot last.
Kuwait is now producing at least 1.2 million b/d, and the rate will continue to grow in 1993. Production increases can be seen in key areas such as the U.K. North Sea, where the Piper Alpha platform will come on stream, and in growth regions such as Yemen and Norway. U.S. and Russian output will continue to decline but probably not as fast as in the past few years. And Iraq's embargoed producing potential hovers over the market like smoke from burning crude.
It all points to a year of increasing supply with limited demand growth. OPEC will have to compel its members to produce below capacity. Doubts about its ability to perform this essential function partly explain the recent crude price slump. The rest of the explanation comes from oversupplied product markets.
ENCOURAGING SIGNS
The encouraging signs are recognition of the problem and corrective action by market participants most able to make a difference. This month, refiners began significant reductions in crude runs. And Iran, Nigeria, and Venezuela have announced plans to cut crude production. These are proper responses to price weakness. Lower refinery runs will trim recently heavy product flows into storage. And production cuts by key OPEC members provide a needed demonstration of responsible market behavior. The moves rallied crude prices at mid-month.
The oil market thus enters 1993 with conditions closer to normal than they have been since August 1990; that is, facing the need to accommodate capacity surpluses. And developments at the end of 1992 give it reason to believe that the accommodation might occur with less than the usual strain.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
