Huge production losses from the Commonwealth of Independent States combined with a large increase from the Organization of Petroleum Exporting Countries to result in first half world crude production virtually flat with a year ago.
Total world crude flow averaged 59.899 million b/d in first half 1992, up only 29,000 b/d from first half 1991.
First half C.I.S. production plummeted 1.292 million b/d from the year ago level to average 9.331 million b/d, dragging down crude production of Communist and former Communist nations to a level not seen for 6 years.
OPEC production averaged 23.899 million b/d in the first half, up 985,000 b/d from the year ago level and offsetting 76% of the drop in C.I.S. production.
Total non-OPEC production, including the C.I.S., was down 956,000 b/d to an average 36 million b/d for the first half, while non-OPEC production excluding the C.I.S. advanced 336,000 b/d despite a 208,000 b/d drop in U.S. production.
Non-OPEC share of the world total slipped to 60.1% from 61.7% in first half 1991.
Worldwide demand in the first half increased 500,000 b/d, buoyed by increased consumption in Organisation for Economic Cooperation and Development countries.
And oil prices remained fairly stable in first half 1992, as decreased OPEC capacity helped balance supply and demand.
With sliding C.I.S. production and a continuing embargo on Iraqi oil exports, supplies are expected to tighten in the second half. And with virtually no surplus capacity available to meet any surge in demand, oil prices could climb again.
C.I.S. DECLINE
C.I.S. oil production averaged 9.331 million b/d in first half 1992, down 12.2% from first half 1991. Production averaged 9.003 million b/d last June.
Average C.I.S. crude production, off 25.2% from the 1987 peak in a decline trend expected to continue through yearend.
The slide in oil production from the former U.S.S.R. has accelerated the past 2-1/2 years. U.S.S.R. production peaked in 1987 at 12.48 million b/d and fell slightly to 12.44 million b/d in 1988. The fall picked up speed in 1989 with average production totaling 12.14 million b/d. Production fell 750,000 b/d in 1990 to 11.39 million b/d and a further 1.09 million b/d in 1991 to 10.3 million b/d.
For the first half of this year C.I.S. production represented only 15.6% of the world total. That compares with 17.7% in first half 1991 and 22.3% in 1987.
The International Energy Agency last month cited a larger than expected decline in apparent oil consumption in the former C.I.S., especially in the non-Russian republics, that helped underpin a continuing rise in C.I.S. exports of crude and products--2.25 million b/d in June and 2.4 million b/d in July. But TEA projects net C.I.S. exports for the year will be down to 1.8 million b/d in 1992 from 2.05 million b/d in 1992.
OTHER NON-OPEC
Production in non-OPEC countries excluding the C.I.S. rose 1.3% to 26.669 million b/d in first half 1992.
The share of total world production from this group increased to 44.5% from 44% a year earlier.
Fourteen non-OPEC countries posted production gains of 15,000 b/d or more for first half 1992 compared with same time last year.
Norway led the group with a production increase of 234,000 b/d, surpassing the U.K. as the largest oil producer in Europe.
The U.K. posted a production increase of 114,000 b/d, and total North Sea production jumped 365,000 b/d to average 4.019 million b/d in 1992's first half.
Offsetting those gains were declines in several non-OPEC countries, including seven that posted declines of 15,000 b/d or more, led by the C.I.S. plunge.
The next largest decrease was in the U.S., where production fell 208,000 b/d to 7.277 million b/d, followed by India's production decline of 72,000 b/d to 584,000 b/d.
OPEC PRODUCTION
OPEC flow in first half 1992 was highlighted by the recovery in production from Kuwait and the Neutral Zone and Saudi Arabia's decision in March to cut production.
Total OPEC production averaged 23.899 million b/d in the first half, up 985,000 b/d from first half 1991 and offsetting the large decline in non-OPEC production.
OPEC regained some market share, moving up to 39.9% of total world production from 38.3% in first half 1991. OPEC's market share for all of 1991 was 39.1% of the world total, compared with 38.5% in 1990.
OPEC's share reached 49.1% in 1979 but fell to a recent low of 29.9% in 1985 as demand slid in response to high oil prices. OPEC's world market share has climbed since 1985 and is expected to continue to move up.
Saudi Arabia's production during the first half averaged 8.18 million b/d, up 217,000 b/d from first half a year ago.
The Saudis started 1992 producing more than 8.5 million b/d. However, they chose to cut production to 8 million b/d starting in March in order to help tighten supplies and thus support a higher price level. Crude oil prices had begun to weaken early in the year due to excess supplies resulting from Kuwaiti and Neutral Zone production reentering the market and Saudi Arabia boosting production to make up for loss of supplies resulting from the Persian Gulf crisis.
Including its 50% share of Neutral Zone production, Saudi oil flow averaged 8.332 million b/d in the first half, up 355,000 b/d from first half 1991.
KUWAIT, IRAQ STATUS
Part of Kuwait's production capacity was restored this year, and the country produced an average 636,000 b/d in the first half. That compares with just 30,000 b/d a year earlier.
Kuwait production climbed throughout the first half, reaching 830,000 b/d in June. There have been reports that production reached 1 million b/d by the end of August. Prior to the Persian Gulf war Kuwait's capacity was estimated at more than 2 million b/d.
Neutral Zone production also increased during first half 1992. Production averaged 304,000 b/d, compared with only 27,000 b/d in first half 1991.
Iraq's unwillingness to comply with United Nations cease-fire resolutions has resulted in a continuation of the embargo on Iraqi oil exports. Iraq's production is mainly for internal consumption, with a small amount reportedly exported to Jordan.
Even with the international trade constraints, Iraq's production has moved up, averaging 416,000 b/d for the first half compared with 227,000 b/d in first half 1991. Ira 's reduction throughout 1991 averaged only 283,000 b/d, compared with 2.038 million b/d in 1990 and 2.897 million b/d in 1989.
OPEC ADJUSTS
To make up for the losses to the market from Iraq and Kuwait in 1991, other OPEC members boosted production.
But during first half this year, there were only minor adjustments to production levels by other OPEC members.
Most of the large producers, other than Saudi Arabia, reduced production in first half 1992. It may have been an effort to make room for added production from Kuwait or to drop back to a more readily sustainable production level.
Seven OPEC members posted declines: Algeria 30,000 b/d to 772,000 b/d, Indonesia 78,000 b/d to 1.38 million b/d, Iran 6,000 b/d to 3.317 million b/d, Libya 22,000 b/d to 1.478 million b/d, United Arab Emirates 125,000 b/d to 2.314 million b/d, and Venezuela 90,000 b/d to 2.235 million b/d.
Three of the smaller producers posted increases. Production in Ecuador was up 25,000 b/d to 318,000 b/d, Gabon 15,000 b/d at 307,000 b/d, and Qatar 14,000 b/d to 384,000 b/d.
OPEC QUOTA
The damage to Kuwait's and Iraq's productive capacity and the U.N. embargo on Iraq oil exports reduced OPEC capacity considerably from the level prior to the conflict.
Even considering expanded capacity in Saudi Arabia and elsewhere, total OPEC sustainable capacity was reduced to about 23-24 million b/d, compared with about 28-29 million b/d before the Persian Gulf war.
An apparent need for a new quota agreement had resurfaced toward yearend 1991. Crude prices began to slide toward yearend as demand diminished, aggravated by the anticipated seasonal slump in consumption in second quarter 1992.
With most member countries producing close to capacity and production being added from Kuwait, OPEC production was greater than the projected second quarter demand for OPEC oil.
That excess available crude put downward pressure on prices, forcing OPEC to adopt a new quota intended to balance demand and supply in the second quarter. The new quota called for maximum OPEC production of 22.982 million b/d, including 812,000 b/d from Kuwait and 505,000 b/d from Iraq.
However, there was not complete agreement on the quota.
Saudi Arabia agreed to cut its production only to 8 million b/d, which, if adhered to, would push the OPEC quota to 23.095 million b/d. Although OPEC production during the first half has been well above that figure, prices have been relatively stable. Prices are up from year ago levels but not up to the target of $21/bbl for a basket of OPEC crudes.
Because the call on OPEC oil in 1992 has been close to production capacity, there has been little reason to worry about setting accurate quotas to restrict member country production to balance supply and demand. The move by Saudi Arabia to cut production by about 500,000 b/d effectively balanced the market and prevented a seasonal slide in prices. There was no need to place more restrictions on production from other OPEC members.
The problem for OPEC in the future will be accommodating additional production from Kuwait and added Iraq production when it is allowed to reach the world market.
This will require a new set of quotas. OPEC has had problems with getting quota compliance from all members in the past, particularly when the quota is set well below productive capacity.
WORLDWIDE DEMAND
IEA reported world oil consumption averaged 66.85 million b/d during first half 1992, an increase of 500,000 b/d from first half 1991.
Total OECD petroleum product demand moved up 300,000 b/d to 38.15 million b/d.
Most of the growth in OECD demand was due to increased consumption in North America as the U.S. economy continued to move out of the recession. During first quarter a year ago the level of U.S. economic activity was declining.
IEA pegs North American demand at an average 18.5 million b/d in first half 1992, up an estimated 250,000 b/d from the first half of 1991. Demand in OECD Europe moved up 50,000 b/d to an estimated 13.45 million b/d. Consumption in OECD Pacific countries remained flat at 6.2 million b/d.
Despite a sharp drop in the C.I.S., first half non-OECD demand rose 200,000 b/d from a year ago to 28.7 million b/d.
IEA said consumption in the C.I.S. year to year fell 900,000 b/d to an average 7.65 million b/d for first half 1992 and in non-OECD Europe 100,000 b/d to 1.15 million b/d. Those combined declines were more than offset by increases in non-OECD developing countries.
Consumption increased in non-OECD Asia 550,000 b/d to 6.2 million b/d, in the Middle East 350,000 b/d to 3.7 million b/d, in Latin America 200,000 b/d to 5.3 million b/d, and in Africa 100,000 b/d to 2.15 million b/d.
Meantime, the U.S. Energy Information Administration estimated first half 1992 U.S. petroleum products demand at 16.674 million b/d, up from 16.443 million b/d in first half 1991, due mainly to the improvement in economic activity.
PETROLEUM STOCKS
IEA estimates show a stock drawdown averaging about 150,000 b/d for first half 1992. Stocks were reduced in first quarter at a rate of 1.3 million b/d, mostly offset by a second quarter stockbuild of 1 million b/d.
Last year total crude and product stocks moved up an average 200,000 b/d for the first half. Stocks were reduced 200,000 b/d in first quarter 1991, followed by a stockbuild of 600,000 b/d in the second quarter.
The modest drawdown in first quarter 1991 was a reflection of the recession in the U.S. and sluggish economic growth in many other industrial countries.
The IEA survey of company and public stocks in OECD countries shows total primary stocks as of last July 1 at 3.379 billion bbl, down 22 million bbl from a year earlier. Company stocks were 2.353 billion bbl, down 44 million bbl and public stocks were up 22 million bbl at 1.026 billion bbl.
Total company and public stocks as of July 1 represent 97 days of consumption, down from 99 days a year earlier. Company stocks represent 67 days of supply, down from 70 days july 1, 1991, and the lowest level in the last 20 years. Public stocks, not generally available for consumption but instead held for national emergencies, were 30.4% of total stocks.
The operating philosophy regarding company stocks has changed dramatically since the mid-1980s. During 1974-84 company stocks were 76-92 days of consumption and averaged 82.4 days. During the past 7 years, company stocks have been 67-72 days of consumption and averaged only 68.9 days.
PRICES
Lower OPEC productive capacity has continued to make it easier for OPEC to control production at a level that balances world supply and demand, yielding a significant period of relatively stable prices.
IEA estimates the price of world export crude oil in first half 1992 averaged $17.34[bbl, down slightly from $17.48/bbl in first half 1991.
The first half average a year ago was inflated by high prices in January--an average $22.27/bbl for the month--sparked by the crisis in the Persian Gulf.
Oil prices started 1992 at $16.30/bbl, slipping to $15.94/bbl the first week of March as demand weakened following the winter heating season.
At that time Saudi Arabia announced a cut in production, and prices started to move up. By the last week of June the average export price was up to $19.92/bbl.
Prices have weakened a bit in recent weeks due to sluggish product demand. The latest price was $18.63/bbl for the week ended Aug. 28.
Prices have been unusually stable since the end of the fighting in the Persian Gulf region. Since February 1991 the average monthly price of world export crude oil has ranged from a low of $16.01/bbl to a high of $19.77[bbl. So far this year the band has been even narrower, with prices at $16.22-19.68/bbl.
The OPEC reference price averaged $18.11/bbl for first half 1992, down from $18.94/bbl for first half 1991. The price was $17.52/bbl the first week of 1992. The price slipped slightly to $16.85/bbl the second week of March, and following the Saudi production cut, it moved up to $20.70/bbl the last week of June.
This year the monthly average for the OPEC reference price has been $17.04-20.33[bbl. This price has also weakened in recent weeks, slipping to $19.31/bbl the week ended Aug. 28.
SECOND HALF SUPPLY/DEMAND
There usually is a substantial increase in demand for petroleum products during the winter, leading to an increase in demand for crude oil.
Any seasonal spike this year is expected to result in a tight market. With little excess capacity available, there will be upward pressure on prices.
IEA predicts a modest increase in world petroleum product consumption for the entire year. World demand is expected to advance 400,000 b/d to 67.1 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 industrialized OECD countries and developing countries.
OECD demand is expected to move up 300,000-400,000 b/d, mainly due to an increase in North America. OECD Europe demand is also expected to increase, while OECD Pacific demand remains constant.
Demand in the non-OECD countries is projected to remain at the same level as 1991, 28.6 million b/d. Demand in the C.I.S. will fall another 900,000 b/d to 7.4 million b/d, while demand in eastern Europe will be down another 100,000 b/d in 1992.
Those declines will be offset by increases elsewhere.
Demand in China is projected to move up 100,000 b/d, and demand in other Asian developing countries will jump 6.9% to 6.2 million b/d.
Demand in the Middle East will move up 200,000 b/d to 3.7 million b/d, in Latin America 100,000 b/d to 3.7 million b/d, and in Africa 100,000 b/d to 2.2 million b/d.
IEA predicts total non-OPEC supply will 800,000 b/d to an average of 40.6 million b/d for 1992.
Supply from the former U.S.S.R. will be down 1.2 million b/d at an average 9.2 million b/d for 1992. Part of that decline will be offset by increased production in other non-OPEC countries.
CALL ON OPEC OIL
With increasing demand and declining non-OPEC supply, demand for OPEC oil will rise.
Demand for OPEC oil will depend on shifts in stocks.
Assuming no net change in the stock level, demand for OPEC oil will average 26.5 million b/d for 1992, up 1.1 million b/d from 1991. That breaks out as 2.1 million b/d of natural gas liquids and 24.4 million b/d of crude oil.
If stocks are drawn down in 1992 because of relatively weak growth in product consumption, demand for OPEC crude oil could be somewhat lower. However, it is unlikely stocks will be drawn down substantially during the second half, given their modest levels as of July 1.
And it is quite likely there will be a substantial increase in OPEC production this year.
The estimated increase in demand for OPEC oil will make it easier for the organization to accommodate increased production from Kuwait and still maintain balance in the market. In fact, the additional production may be necessary to help meet demand during the winter heating season.
Assuming no change in stock levels, IEA projections indicate demand for OPEC crude oil will increase to 25.8 million b/d in the fourth quarter and to 26.5 million b/d in first quarter 1993.
Production at those levels is above current estimated OPEC productive capacity. And the market will be very tight in the winter heating season, putting upward pressure on prices.
OPEC will have to be willing to produce at close to capacity, and stocks will have to be used to augment supply or spot shortages could occur with a corresponding increase in prices.
That probably would be a short term situation because OPEC at some point still must grapple with rising production from Kuwait and the potential reentry of Iraqi supplies into the market. Substantial increases from those two countries could result in excess productive capacity, again depressing prices.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
