Crude oil price 'nightmare' as stocks build
Brent crude oil prices took a dive to the $12/bbl region this week as traders anticipated slowing demand growth and because of "colossal" Organisation for Economic Cooperation and Development (OECD) stock-building.
London's Centre for Global Energy Studies (CGES) says that, despite production cuts by Organization of Petroleum Exporting Countries (OPEC) and some non-OPEC producers, the market remains oversupplied, and oil demand in Asia is worse than expected.
"With dated Brent at $12/bbl," said CGES, "the oil industry has plunged back into the nightmare of dramatically low oil prices. A tidal wave of oil is engulfing Europe and the U.S., necessitating further volume cuts to contain the damage. The truth is OPEC and its new-found allies agreed in March to cut too little and too late."
The analyst says the global stockbuild in first quarter 1998 was about 1.5 million b/d, yet this unseasonal trend did not show in OECD countries. OECD companies' stocks actually declined by 15 million bbl during the first quarter. The missing oil was thought to have been stored outside the OECD or to be in tankers on the way to Europe and the U.S.
"With a sustained contango to whet their appetites," said CGES, "companies have been busily stock-building much of this oil in second quarter 1998, but such builds must eventually hit the buffers.
"The reported European stockbuild for April and May was 53 million bbl, with the U.S. almost matching this at 45 million bbl. A 1.6 million b/d second quarter global stock-build is not unusual but spells trouble after a huge first quarter build.
"Worldwide stock cover at the start of second quarter 1998 was 3 days' worth higher than last year. There is too much oil around, and the market is feeling now that the Brent squeeze is over."
Asia's continuing economic downturn is behind the low oil prices. CGES said low demand in the region has reduced expected incremental global oil demand for this year to 1.45 million b/d, compared with 2 million b/d recorded in 1997.
"Asian demand is causing all the headaches," said CGES, "by offering only a puny 180,000 b/d of additional demand in 1998 versus 900,000 b/d in both 1996 and 1997. Fortunately for the oil industry, incremental demand in the FSU and Eastern Europe of 200,000 b/d, in Latin America of 300,000 b/d, and Middle East/Africa of 200,000 b/d is expected to redress the balance somewhat."
Relief in sight?
Looking ahead to this week's meeting of OPEC energy ministers in Vienna, CGES says there is little OPEC and its cutback-agreement allies can do to revive the oil price."Because of the iron law of oil stock accumulation-itself the result of past failures to deal promptly with an impending imbalance-it will take many months of much reduced production for the market to regain a semblance of stability," said CGES.
"We think additional cuts of 850,000 b/d from July onwards should stabilize the price in the third quarter 1998 and even give it a little fillip in the fourth quarter. Cuts so far promised are two thirds of the way there, and the final one third should not be difficult to achieve if OPEC-basket prices are around $11/bbl come the Vienna meeting.
"Delivering the cuts is another matter. In any case, cuts do not imply revenue gains unless prices rise more than proportionately, which is unlikely. Prices, in fact, will drift down again if the market doubts OPEC's ability to cut production as promised."
CGES predicts that, if OPEC and non-OPEC combine to agree to further output cuts of 1 million b/d (including the 450,000 b/d promised last week by Saudi Arabia, Venezuela, and Mexico), Brent crude will average $13.50/bbl in third quarter, $14.50/bbl in fourth quarter, and $14.40/bbl in first quarter 1999.
If OPEC's meeting only leads to combined output cuts of 600,000 b/d, CGES forecasts Brent crude prices will average $13.30/bbl in third quarter, $13.70/bbl in fourth quarter and $12.80/bbl in first quarter 1999.
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