GLOBAL MARKETS, DRILLING HINGE ON OIL PRICE

Oil price will be the critical variable in international markets and worldwide drilling this year.

And as long as extraordinary tensions linger in the Middle East, the oil price will be difficult to predict.

Given historically unusual freedom of movement in a crisis last year, the oil price held the market in tight balance after Iraq invaded Kuwait on Aug. 2.

The process took its toll on economic growth. This year elevated oil prices will continue to restrain economic activity and products demand as they stimulate drilling.

International Energy Agency (IEA) expects total oil demand in free-market countries to average 52.03 million b/d in the first three quarters of 1991, down 1.3% from the same period of 1990.

And drilling outside the U.S. and Canada will rise, with size of the increase depending on oil price levels and when and the extent to which tensions ease in the Middle East.

THE MARKET

This year's demand slump will be an industrialized world phenomenon.

IEA predicts demand among members of the Organization for Economic Cooperation and Development (OECD) will average 36.5 million b/d in the first 9 months of 1991, down 1.1 million b/d from the comparable period of 1990.

But demand among developing countries will continue to increase, gaining 400,000 b/d from a year earlier to 15.53 million b/d.

For the first three quarters, IEA assumes higher oil prices and less total economic activity than in 1990.

According to latest IEA estimates, total consumption by free-market countries increased 1.5% to 53.1 million b/d for all of 1990. OECD demand increased marginally to 37.8 million b/d, and non-OECD consumption jumped 4.1% to 15.3 million b/d.

Fourth quarter 1990 OECD demand, however, was down sharply from its level of a year earlier because of the price jump and economic slowdown: 38.5 million b/d vs. 39.3 million b/d.

Most of the fourth quarter demand decline came in North America, where weather was a factor. December 1989 was extremely cold, which boosted heating fuel consumption and exaggerated the basis for comparison.

The late 1990 economic slump, aggravated if not caused by the oil price jump, is evident in the North American consumption decline from the third quarter to the fourth. Demand usually rises between the quarters due to colder weather.

RESTORING BALANCE

The demand slump helped keep physical shortages from developing in the aftermath of the Iraqi invasion.

An international embargo blocked crude and product exports of 4.2 million b/d. With fourth quarter demand projected before the invasion at 1.6 million b/d above the third quarter level, and with only 3.6 million b/d of spare production capacity believed available within members of the Organization of Petroleum Exporting Countries, the market faced a theoretical fourth quarter shortfall of 2.2 million b/d.

Prices shot up as a consequence. The price of world export crudes peaked at $36.11/bbl the week of Sept. 28, compared with averages of $13.49/bbl in June and $14.93/bbl in July.

The price spurt slashed consumption in free-market countries. IEA's latest estimate of fourth quarter demand, 54.1 million b/d, is 1.2 million b/d less than what it was projecting just before the Iraqi invasion.

Higher prices also boosted supply. Stocks contributed about 500,000 b/d in the fourth quarter, and non-OPEC production increased by about the same amount.

Most important, OPEC members, led by Saudi Arabia, increased output by more than what earlier was considered possible. As a result, the market balanced at IEA's reduced level of fourth quarter demand, with little production capacity to spare.

IEA projects a decline in non-OPEC supply to 28.6 million b/d in the first quarter of 1991. If OPEC production doesn't exceed fourth quarter 1990's 22.7 million b/d of crude-including 500,000 b/d estimated from Iraq and Kuwait-and 1.9 million b/d of NGL, stocks will have to provide 400,000 b/d to meet demand projected at 53.6 million b/d.

Demand will decline in the second and third quarters, relaxing the pressure on stocks and OPEC production capacity. At projected demand levels and with no stock change, the call on OPEC crude would fall to 20.1 million b/d in the second quarter and 21.2 million b/d in the third.

OPEC PRODUCTION

According to IEA, OPEC production by the countries other than Iraq and Kuwait moved up from an average 18.8 million b/d in the second quarter of 1990 to an estimated 22.2 million b/d in the fourth quarter. The U.S. Central Intelligence Agency had estimated available production capacity in these countries at 22.04 million b/d.

Saudi Arabia accounted for 70% of the increase. Its production average rose from 5.4 million b/d in the second quarter to 7.8 million b/d in the fourth. Prior to the invasion, Saudi capacity had been estimated at 7 million b/d.

Venezuela and the United Arab Emirates each boosted production by about 300,000 b/d to 2.3 million b/d in the fourth quarter. Nigeria and Libya increased production by 200,000 b/d each, Nigeria to 1.9 million b/d and Libya to 1.5 million b/d. Those production levels are expected to continue through the first quarter of 1991.

The IEA estimates that Iraqi production fell from 3.1 million b/d in the second quarter to 400,000 b/d in the fourth. Kuwaiti production slumped to about 100,000 b/d from 1.7 million b/d.

OPEC faces the formidable task of allocating production quotas whenever the crisis ends and Iraq and Kuwait resume oil exports. Other major OPEC producers-including Saudi Arabia, the U.A.E., and Venezuela-are expanding production capacity, so with resumed production from Iraq and Kuwait, OPEC will be able to produce far more crude than the market needs.

THE DRILLING OUTLOOK

This price uncertainty clouds the drilling outlook.

If crude prices average $18/bbl in 1991 compared with an estimated $19.50/bbl for 1990, the international rig count may average only 950 compared with 935 in 1990.

However, if crude prices average $25/bbl in 1991, the international rig count will average 1,010, according to Oil & Gas Journal projections. Figures exclude the U.S.S.R. and Eastern Europe.

Baker Hughes Inc. figures show little change in the total international rig count for November 1990 from November 1989 but some important country increases and declines.

There were 900 rigs active in November 1990, five more than a year earlier.

The largest year to year November increases were in Mexico, 109 vs. 87; Venezuela, 37 vs. 29; U.K., 46 vs. 36; Italy, 27 vs. 18; and Saudi Arabia, 11 vs. 4.

Yugoslavia had 26 rigs running in November 1990, down from 38 in November 1989, and Syria had 14 vs. 22.

Baker Hughes has not received reports since early August from Iraq or Kuwait. Iraq had 27 active rigs and Kuwait 4 in November 1989.

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