Brent oil falls below $16; outlook gloomy

David Knott
Senior Editor

OPEC Crude Oil Production [71,482 bytes]

Crude oil prices have reached their lowest point since September 1994, and there appears to be no hope in sight for a near-term revival.

Brent crude oil for February delivery closed at $15.79/bbl in London trading on Jan. 5. Although the price had picked up slightly by OGJ presstime, it was still below the $16/bbl mark and expected to remain there for the time being.

Crude oil traders cite four major concerns: rising production by the giants of the Organization of Petroleum Exporting Countries; return of Iraqi oil exports; mild winter weather; and falling Far Eastern oil demand.

Leo Drollas, chief economist at London's Centre for Global Energy Studies (CGES), said the current market weakness appeared in mid-December.

Then U.S. demand began to ease off in readiness for the January turnarounds of U.S. refiners, with the mild winter weather increasing the speed of their rundown.

OPEC production rising

Drollas said OPEC's late November decision to increase production quotas also caused traders to view the new total of 27.5 million b/d as a license for Saudi Arabia, Kuwait, and U.A.E. to produce more.

Since the November accord, Saudi Arabia has hiked output to more than 8.4 million b/d and Kuwait to 2.1 million b/d, still short of their new production quotas (see table, this page).

"Of the three, the U.A.E. so far has said it will increase production to its new quota level," said Drollas. "The markets have read the OPEC agreement as an indication of too much oil coming, even without Iraqi exports."

Drollas said Saudi Arabia's move to get OPEC production quotas increased was a mistake, based on a misreading of market prospects for 1998: "There is worse to come in the short term, notably when Iraqi barrels come back to the market in mid-January."

According to Middle East Economic Survey (MEES), OPEC output averaged 27.78 million b/d of oil in November compared with a record 28.23 million b/d in October.

MEES attributed the fall to lowered output from Iran and Iraq. However, MEES noted Saudi Arabia has recently increased production and said other members reported only minor changes.

As expected the figures show OPEC's main adherents of quotas, Saudi Arabia and Kuwait, raising output in line with higher production quotas agreed to in November (OGJ, Dec. 8, 1997, p. 21).

Other market concerns

On Jan. 6, United Nations Sec. Gen. Kofi Annan approved a revised plan for distribution of food and medicine under its agreement with Iraq for export of oil to fund purchase of much-needed supplies.

At OGJ presstime, the first Iraqi oil cargoes under the third 6-month U.N./Iraq agreement were expected to reach international customers around Jan. 14, with a further short-term oil price fall expected to follow.

Drollas said the market weakness has been compounded by the economic woes of Southeast Asia's rapidly developing nations, which are expected to lead to reduced oil demand.

"We don't know much yet about what Far Eastern demand is doing," said Drollas, "but we expect that anticipated incremental demand will not be there. Maybe 300,000-400,000 b/d could be lost from the Far East market."

$15/bbl oil?

CGES predicts the price of Brent crude will hover at $15-16/bbl in the short term, with occasional dips below $15/bbl. A prolonged period of below-$15/bbl oil could even force an emergency OPEC meeting.

"They must be getting worried in Riyadh," said Drollas. "With another week to go before Iraqi cargoes are dispatched, there is nothing on the horizon to offer hope of a price recovery.

"Only two things could prevent prices going lower: a cold spell or the Saudis returning to producing 8 million b/d. Saudi Arabia might cut back to take the weakness out of the market; but then they would be acting as swing producer, which they don't want to do again."