Two events this week provide reminders that the oil market cannot stay on its present, relatively steady course indefinitely.
The first comes Wednesday, when Organization of Petroleum Exporting Countries ministers meet in Geneva. They'll decide on a production quota for the fourth quarter. As usual, how they decide will be as important as the decision itself.
The current quota is more political benchmark than production limit. Average OPEC output in the first half topped the 23 million b/d ceiling by 900,000 b/d (see story, p. 23). Prices have held because demand for OPEC crude exceeded the quota, too. Since Saudi Arabia trimmed flow by 500,000 b/d in March, the market has needed about what OPEC can produce. Rising production from Kuwait accommodates demand growth. Iraq still can't export oil. And the only quota buster is the only OPEC member exercising significant restraint-Saudi Arabia-and it's still producing 8 million b/d.
A CONVENIENT BALANCE
The market thus has staved in convenient balance for most of the year. Keeping it that way will be tricky. Kuwait's production, now about 1 million b/d, will continue to climb. An expected slump in exports from the C.I.S. might offset Kuwaiti gains, but so far internal consumption has fallen almost as fast as production. International Energy Agency estimates total first half oil exports from the former Soviet Union declined from 1991's first half average by only 400,000 b/d. The other major uncertainty, of course, is timing of an Iraqi export resumption.
The supply imponderables make near term demand--and OPEC's assessment of it--especially important. It looks shaky. Last month IEA's implicit projections for industrial world oil consumption fell for fourth quarter 1992 and first quarter 1993. The full year demand projection didn't change because of a balancing second quarter revision. Why the cuts in the next two quarters? Economic performances below expectations, especially in the U.S. In setting a fourth quarter quota, OPEC must take that adjustment, and the reason for it, very seriously.
Economic jitters relate to the second key event of the week: France's referendum Sunday on the Maastricht Treaty covering European monetary and political union.
After Danish rejection of the treaty last April, a French no vote would kill the treaty and critically wound the unification effort. Maastricht supporters see economic doom in such an outcome, an assessment that probably exaggerates things. Europe has come this far without Maastricht and probably can endure a while more without it. But a Maastricht defeat might indeed unravel the European exchange rate mechanism (ERM). A German mark kept dear by Bundesbank inflation fears and a U.S. dollar depressed by election year interest rate cuts have stretched the ERM and associated economies to their apparent limits.
EFFECTS ON DEMAND
No one can predict the economic effects of a European currency realignment, which might occur regardless of the French vote. European uncertainties on this scale plus the sputtering economies of the U.S. and Japan do not add up to robust petroleum demand.
In Geneva, OPEC ministers must frame their fourth quarter production decisions in these realities. They can only hope their oil revenue dollars buy more in Europe later in the year than they do now. With crucial economies trembling, and with Iraqi exports looming around some indistinct corner, September 1992 looks like a good time to aim low with demand and price expectations. When questions outnumber answers, there's nothing wrong with settling for the chance to be pleasantly surprised.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
