WORLD OIL SUPPLY ADEQUATE FOR '93'S HEALTHY DEMAND

Robert J. BeckEconomics Editor

World oil supply and demand fundamentals have changed little in the past year, bringing some stability to the market. That could change in 1993 as demand resumes a more healthy growth rate, and production declines continue in the U.S. and the C.I.S.

Though there's little chance average prices will increase significantly, crude markets could be more volatile this year.

Offsetting upward pressures on oil prices resulting from accelerated demand are plans by Persian Gulf producers to expand productive capacity, the possibility that Iraq will reenter the international oil market, and continued economic decline in eastern Europe and the former republics of the Soviet Union.

When it's all added up, world oil supply looks more than adequate for 1993. If events occur in a particular combination, prices could weaken.

WORLDWIDE DEMAND

According to the International Energy Agency (IEA), total world petroleum demand will be up only marginally through the second quarter of 1993 compared with a year earlier. Declining consumption in the C.I.S. will offset much of the demand growth in the rest of the world.

Outside of the C.I.S. and East Europe, there are already indications that faster economic growth will boost petroleum demand in 1993 in many of the major consuming areas.

Estimates for the last half of 1992 indicate, a surge in demand in the Organisation for Economic Cooperation and Development (OECD) countries and in developing countries, excluding the C.I.S. and East Europe.

OECD demand in the third quarter last year was up 700,000 b/d from a year earlier. And fourth quarter estimated consumption was up 500,000 b/d. In the developing countries excluding the C.I.S. and East Europe, third quarter 1992 demand was up 1.7 million b/d from a year earlier; fourth quarter demand was up 900,000 b/d from the same period in 1991.

Total world demand for the first two quarters of 1993 is estimated to average 67.25 million b/d, up only 0.2% from an average of 67.1 million b/d over the first half of 1992.

Demand in the C.I.S. will drop to 6.45 million b/d for the first half this year from 7.6 million b/d over the same period a year earlier. Consumption will be down over 2 million b/d from the 8.55 million b/d for first half 1991.

For the rest of the world, IEA estimates demand during first half 1993 at 60.8 million b/d, up 2.2% from the 59.5 million b/d over the first half last year.

This increase of 1.3 million b/d will be scattered throughout the world. About one-third will occur in the industrial countries of the OECD. Total demand for OECD countries will average 38.75 million b/d during the first half of 1993, up 450,000 b/d from first half 1992.

The economic upswing in the U.S. is expected to boost North American consumption. Demand for North America is projected at 18.95 million b/d in the first half of this year compared to 18.6 million b/d last year.

For the remainder of the OECD countries, demand growth will be modest. IEA projects first half consumption at 19.8 million b/d, compared to 19.7 million b/d over the same period last year. Product consumption in OECD Europe will reach 13.5 million b/d for the first half this year vs. 13.45 million b/d last year.

Demand for the OECD Pacific countries will also increase only marginally.

Demand in the developing countries, including China, will average 22.05 million b/d for first half 1993, up 850,000 b/d compared with first half 1992. Excluding China, demand in the Asian developing countries is projected to be up 400,000 b/d to 6.75 million b/d for the first half this year.

Latin American consumption will gain 200,000 b/d to 5.45 million b/d for first half 1993. Middle East demand will grow by 150,000 b/d to average 3.85 million b/d for the first half of this year.

Total worldwide demand for petroleum has edged up slowly in recent years. Falling consumption in the C.I.S. has been offsetting increases elsewhere in the world. Worldwide demand moved up only 1.5% during 1989-92 to 67 million b/d. Over the same period, consumption in the former U.S.S.R. and C.I.S. fell from 8.8 million b/d in 1989 to 7.1 million b/d in 1992.

And it appears that demand in the C.I.S. will fall close to another 1 million b/d in 1993.

Last year brought the first substantial growth in petroleum demand in the OECD countries since 1989. Demand in OECD countries inched up over the 1989-91 period from an average 37.8 million b/d to 38 million b/d. Demand jumped to 38.5 million b/d in 1992.

In 1989-91, increased demand in OECD Europe and the Pacific was offset by declining demand in North America. Petroleum consumption in North America fell from 19.3 million b/d to 18.6 million b/d. It then moved up last year to 18.8 million b/d.

A recession in the U.S., Canada, and the U.K. in 1991 and a slowdown in economic growth in Japan and Germany in 1991 and 1992 slowed economic growth for the entire OECD.

Growth in Gross Domestic Product (GDP) for the OECD slipped from 3.3% in 1989 to 2.5% in 1990 and only 1% in 1991. Due to the recovery in the U.S. the OECD economic growth rate recovered to 1.8% in 1992.

The improvement in the U.S. was offset by a drop in the growth rate in Japan from 4.5% in 1991 to 1.8% in 1992. Germany's economic growth rate fell from 3.1% in 1991 to only 1.3% in 1992.

Some improvement is expected in the near future. According to the IEA, the GDP for the OECD countries will increase at a 2.5% rate during the first half of 1993.

SUPPLY TRENDS

The OPEC countries were producing near capacity throughout 1992, and OPEC output was up substantially from the previous year.

Production from Kuwait continued to climb during the year, but the embargo kept oil from Iraq off the market. Declining production in the C.I.S. enabled OPEC to produce almost at capacity even though demand growth was modest.

Saudi Arabia lowered output slightly to help balance the market and make room for increasing volumes from Kuwait.

According to IEA estimates, OPEC crude production averaged 24.1 million b/d in the first quarter of 1992, dropping only slightly to 23.6 million b/d in the second quarter and recovering to 24.5 million b/d in the third quarter.

OPEC production is expected to average close to 25 million b/d for the fourth quarter of 1992, bringing average output to 24.3 million b/d for the year. OPEC crude production averaged 23.3 million b/d in 1991.

OPEC has been producing close to capacity since the Persian Gulf conflict in late 1990 and early 1991. This has made it relatively easy for the group to abide by quotas aimed at balancing the market.

More production discipline may be needed in the future, however. A number of OPEC countries are expanding production capacity, and additional capacity is being added outside OPEC.

PRODUCTION OUTLOOK

IEA projects a decline in non-OPEC total liquids supply during the first half of 1993. Total non-OPEC supply, including processing gain, will drop to 40 million b/d in the first quarter this year and 39.4 million b/d in the second quarter. This compares with 41.2 million b/d in first quarter 1992 and 40.3 million b/d in the second quarter last year.

For the first half this year, non-OPEC supply will average 39.7 million b/d compared with 40.75 million b/d during the same period of 1992.

The key reason for the decline is an estimated sharp drop in C.I.S. output. Production in the former U.S.S.R. will average only 8.1 million b/d for first half 1993, down from 9.35 million b/d in first half 1992.

Non-OPEC production, excluding the C.I.S., will gain slightly to an average 30.2 million b/d from 30 million b/d the year before.

An increase in worldwide demand in 1993, combined with only a modest increase in non-OPEC output, could increase demand for OPEC oil.

The outcome depends heavily on events in the C.I.S. Both consumption and production have been declining in recent years. If production falls faster than demand, there will be more room in the market for OPEC oil.

According to the IEA, total OPEC production in October and November of 1992 reached 25.2 million b/d, the highest level since 1980. As a result, total world supply moved up to 67.6 million b/d despite the decline in C.I.S. output.

If OPEC sustained that level of output during the fourth quarter of 1992, there would have to be a small reduction in stocks worldwide to meet rising winter demand. About 500,000 b/d would have to be drawn from stocks to balance the market.

At that level of OPEC output during the first quarter this year, stocks will have to provide an additional 1.3 million b/d of supply to meet anticipated winter demand. IEA has projected first quarter 1993 world demand at 68.6 million b/d, and non-OPEC supply at 40 million b/d, leaving 28.6 million b/d to be met by OPEC and/or stocks.

OPEC total liquids production is about 27.3 million b/d with crude output at 25.2 million b/d and NGL output 2.1 million b/d.

Downward pressure on prices from the supply side may develop during the second quarter this year. IEA projects worldwide demand at 65.9 million b/d and non-OPEC supply of 39.4 million b/d. This leaves 26.5 million b/d to be met by OPEC and/or stocks.

If OPEC continues to produce total liquids at current levels there will be surplus oil in the market even without any increase from Kuwait or any oil from Iraq.

This potential surplus of around 0.8 million b/d could put downward pressure on crude oil prices, calling for a new quota agreement. OPEC countries with expansion plans may be reluctant to cooperate.

PRICE OUTLOOK

Oil prices have been remarkably stable since the end of the Persian Gulf conflict in January 1991. The price fell sharply immediately following the start of the war and has ranged from $15 to $20/bbl since.

The average price of world export crude oil started 1992 at $16.31/bbl. It fell as low as $15.94/bbl the first week of March, but then moved up to a 1992 high of $19.92 the last week of June.

Prices slumped toward the end of the year as it became apparent that there would be adequate supplies to meet winter heating needs. The price slipped to $16.99/bbl in December.

The pace of the economic upswing in the U.S., Japan, and Germany will have a major impact on demand in 1993. Production in the C.I.S. is a key uncertainty for 1993. It is possible that economic steps could be taken to slow the decline in output.

But currently, it is anticipated that C.I.S. output will fall an additional 1 million b/d this year.

It is also expected that capacity increases in OPEC and other areas will offset this decline.

Developments in the OPEC countries are expected to again have a major impact on the supply side of the world oil market. In addition to increased output from Kuwait and the possibility that Iraq will return to the market a number of the other OPEC countries are expected to continue their expansion plans.

As a result, total OPEC capacity could be up substantially by yearend.

For the year, with the sharp drop in C.I.S. output, non-OPEC supply is expected to fall about 1 million b/d in 1993. And the economic recovery in the industrial countries may boost worldwide demand by 200,000 b/d.

Therefore, the demand for OPEC oil may be up as much as 1.2 million b/d in 1993.

Additional output from Kuwait and the capacity additions in the other OPEC countries are expected to be more than enough to fill this gap.

During the year the timing of the capacity additions relative to the seasonal swings in demand may produce periods of upward pressure on prices, particularly later in the year when refiners are locking in supply for the next heating season.

INTERNATIONAL DRILLING

One of the positive events for the oil industry in 1993 could be an increase in international exploration and drilling activity. New opportunities have opened in a number of countries, many with excellent production potential and a need for investment capital or technical assistance. The international rig count has slipped in recent years, but the decline has been small. Exploration and drilling have been sustained without any major stimulus from higher oil prices.

The Baker Hughes international count of active rotary rigs outside the U.S. and Canada averaged 861 for the first 11 months of 1992. The average was 909 in 1991, 907 in 1990, and 922 in 1989. The number of active international rigs fell during each of the first 10 months of 1992 but then moved up in November to 835 rigs.

Major U.S. international oil companies and several large independent companies are expected to continue to invest a growing share of their exploration and production budgets outside the U.S. this year. The international rig count should move up in 1993 as companies take advantage of a vast array of international exploration and production opportunities.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.