CGES: Oil prices to dive without cuts from OPEC

There is little hope for an improvement in the bleak outlook for crude oil prices contends London's Centre for Global Energy Studies, which also noted that current growing output from Iraq and other Persian Gulf producers is adding to oversupply. "Wherever the market looks," said CGES, "short or longer term, it sees too much oil and no respite from oversupply. OPEC itself seems paralyzed, with neither Saudi Arabia nor Venezuela showing any sign of taking the initiative."

March 2, 1998

3 min read

"Wherever the market looks," said CGES, "short or longer term, it sees too much oil and no respite from oversupply. OPEC itself seems paralyzed, with neither Saudi Arabia nor Venezuela showing any sign of taking the initiative."

CGES reckons OPEC would need to cut its total output to 26 million b/d to achieve an average Brent crude price of $16/bbl in 1998, but OPEC increased its output quota total to 27.5 million in November and has recently been producing about 28 million b/d.

"To cap it all," said CGES, "Saddam might eventually accede to the U.N.'s requests, scotching any possibility of a war-related interruption in Iraqi oil supplies."

Glut

With a zero stock-change call on OPEC, estimated at 27.5 million b/d in first quarter 1998, and OPEC output of 28.1 million b/d in January, rising to 28.6 million b/d in February, the current oversupply is overwhelming, said CGES.

"Of the key players," said CGES, "Venezuela has shown no desire to make way, while Saudi Arabia has increased its discounts on Brent for March delivery.

"With Venezuela and Saudi Arabia likely to suffer oil export revenue losses of $1 billion and $2.4 billion, respectively, between fourth quarter 1997 and first quarter 1998, their pain barriers are coming up fast.

"Saudi Arabia especially must be near its pain threshold, with Arab light selling in the gulf at formula prices not far from $12/bbl fob. Something has to give, but what?"

CGES reckons OPEC will most likely yield eventually to the pressure to cut output and instigate cuts after calling an extraordinary general meeting of energy ministers.

"We estimate," said CGES, "that OPEC output of 26.2 million b/d in the summer months would bring prices up to $16/bbl and set them on a rising path.

"Since such low production levels would be impossible to arrange in one go, given the current climate, a couple of OPEC meetings would probably be needed to achieve the desired result."

If OPEC continues to produce as now, and Iraqi exports continue to flow, CGES predicts dated Brent will average $15.10/bbl in the first quarter, falling to $12.60/bbl in the second quarter, $10.50/bbl in the third, and $9.60/bbl in the fourth.