SECOND HALF ECONOMIC GAINS TO LIFT OIL PRICES

Robert J. Beck
Economics Editor

The oil market is surviving a turbulent 1991 without the price collapse many observers had feared.

An economic recession reduced demand through midyear in the important North American products market. Iraq and Kuwait are still unable to export crude oil, however, and other members of the Organization of Petroleum Exporting Countries have avoided producing more oil than the market needs.

As a result, crude prices have stabilized. A second half economic recovery would raise demand and prices if production capacity doesn't rise. Timing of the resumption of significant Iraqi and Kuwaiti exports remains the crucial variable.

Crude oil and natural gas prices are still too low to stimulate U.S. exploration and production activity. Worldwide activity is down slightly from levels of a year ago, but there are signs of improvement.

The U.S. rig count was 881 the week of June 28, compared with 1,021 a year earlier. But the count was moving up from a low of 802 in May. The average for the year to date is 954, compared with 953 in 1990. The international rig count was 905 in May this year, compared with 937 last year. The international count is up from 868 in January.

In the U.S. and elsewhere, demand for crude oil and petroleum products is expected to rebound during the second half.

Crude oil production capacity of members of the Organization of Petroleum Exporting Countries has been reduced to 23-24 million b/d. Fourth quarter demand for OPEC oil is expected to climb to the to the top of that range, which should lift prices.

In turn, the higher prices will encourage companies to release some of the exploration funds they budgeted this year but have so far been reluctant to spend.

In the U.S., petroleum product demand was down sharply in the first half due to recession. Demand will be higher in the second half than in the first if the economy recovers as expected and if fourth quarter weather is normal. The year's demand will remain below that of 1990 nevertheless.

U.S. production is up this year because of an increase in Alaskan output following North Slope maintenance projects that trimmed flow last year. Total U.S. crude production will be down marginally for the year, and total liquids output will exceed 1990 levels.

The higher domestic output and lower demand will reduce U.S. imports in 1991.

Product prices have held up despite the slump in demand. Refining margins have been strong as a consequence. Product exports increased in the first half.

HIGHLIGHTS

Here are highlights of Oil & Gas Journal's midyear U.S. forecast for all of 1991:

• Demand for petroleum products will drop 1.7% from the level a year ago. This is a sharper fall than the 0.6% decline forecast at the beginning of the year (OGJ, Jan. 28, p. 49).

• Demand for motor gasoline will decline 1% for the year but rebound in the last quarter as the economy recovers.

• Crude and condensate production will slip by 0.2%, a much smaller decline than the 2.5% anticipated in January. In addition to the Alaskan gain, Lower 48 output held up in the first half of the year on the strength of oil prices elevated during the Persian Gulf crisis.

• Total imports will fall 3.5% in 1991 due to weak first half demand and the production gain. Product imports will be down 15.2% as refiners and marketers rely on domestic refinery output until demand picks up later in the year. Imported crude and products will represent 46.2% of consumption this year vs. 47% in 1990. The record high was 47.7% in 1977.

• Refinery runs will be off 1.7% in 1991 due to lower product demand. The refinery utilization rate is expected to drop to 85.3% from 87.1% in 1990.

• Average crude oil prices will be down 15.4% from last year, when prices jumped during the Middle East crisis.

• Yearend total industry stocks will be up 0.5% from their levels a year earlier. Crude stocks are expected to rise to 340 million bbl, a contingency level allowing refiners flexibility to deal with rapidly changing product demand patterns. Modest crude oil prices will also encourage refiners to add to crude stocks before the winter heating season. Product stocks are expected to fall along with demand by 1.7%.

THE OUTLOOK

The second half demand rebound expected to accompany economic recovery and a return to normal late year weather won't be strong enough to offset the first half slump.

Oil & Gas Journal forecasts average U.S. demand for all petroleum products at 16.695 million b/d, compared with 16.988 million b/d in 1990. It will be the second consecutive year of declining petroleum product demand.

First half 1991 demand is estimated at 16.28 million b/d, down 4.3% from the first half a year ago. Demand for the second half of 1991 is expected to move up 0.9% from the corresponding period last year to 17.11 million b/d.

Total demand, including exports of crude oil and products, will fall 1% to 17.67 million b/d for 1991. Exports will increase 13.8% to 975,000 b/d. First half exports, mainly of products, were up 28.6% at an estimated 1 million b/d.

The demand projection is 245,000 b/d lower than OGJ's forecast earlier in the year. The adjustment reflects the first half's steeper than expected economic decline and warmer than normal first quarter weather.

Demand declines are projected for motor gasoline, kerosine jet fuel, distillates, residual fuel oil, and other products. Increases are projected for naphtha jet fuel, LPG, and ethane.

The motor gasoline demand slump comes as improvements in vehicle fuel efficiency combine with reductions in miles driven per vehicle due to the recession. This will more than offset an increase in the vehicle fleet,

U.S. crude oil and condensate production will average 7.34 million b/d. Alaskan production started to decline in 1989, but last summer's maintenance work exaggerated the rate of decline in 1990. The temporary Alaskan gain and Lower 48 drilling stimulated by last year's price jumps will help slow the overall U.S. production decline rate in 1991.

Lower 48 output will slip only 1.1% in 1991 to 5.52 million b/d. The 0.2% drop in total U.S. output follows a 3.4% decline last year and 6.5% the year before. The expected 1991 production average will be the lowest since 1962.

Total petroleum imports will average 7.71 million bid.

Contrasting the crude stock gain, product stocks will slide to 700 million bbl. Product stocks dipped close to minimum operating levels at 660 million bbl at yearend 1989 but recovered last year to 712 million bbl.

Refinery crude runs will slip to 13.18 million b/d, and average refining capacity will be up 0.3% at 15.67 million b/d.

Product prices are expected to hold up better than crude prices in 1991 even though demand is down.

PRICES

The average price for world export crudes fell from $24.72/bbl at the end of 1990 to $15.34/bbl the week of Mar. 1. Since then crude prices have been stable in a range of $15.50-17/bbl.

Last year, before Iraq invaded Kuwait, OPEC production in excess of demand weakened prices, raising new fears of a price collapse.

The situation has changed markedly due to the Iraqi-Kuwaiti conflict. Kuwait's production capacity was destroyed, and Iraq's output is curtailed by a United Nations export embargo. OPEC countries that raised output to meet demand during late 1990 have shown sufficient discipline to balance the market at the current price level.

Last year the average world export price dropped from an average $19.27/bbl in January to $13.51/bbl in June, averaging $16.33/bbl for the half. This year's first half average was $17.46/bbl. The June price this year was up 19.9% from a year earlier at $16.18/bbl.

The key to price stability this year is OPEC production at or near the level required to maintain a supply/demand balance. OPEC set a production quota of 22.3 million b/d starting Apr. 1 and renewed it for the third quarter. According to the International Energy Agency, demand for OPEC crude oil averaged 23.1 million b/d in the first quarter. IEA estimates it at 21.1 million b/d in the second quarter and projects demand at 21.8 million b/d in the third quarter, depending upon changes in stocks. IEA has estimated OPEC output during April and May at an average 22.25 million b/d. This output level is below the quota and slightly above the estimated demand.

Elsewhere, summer maintenance projects will reduce output in the North Sea, which will help OPEC prevent a global surplus. Crude prices therefore will remain close to current levels until demand starts rising at the end of the third quarter. OGJ projects an export price average for the year of $18/bbl.

The U.S. average wellhead price of crude averaged $17.89/bbl for January and February-latest months for which figures are available-compared with $18.34/bbl for January and February a year ago. Last year the price dropped to $12.79/bbl by June. OGJ projects an average U.S. wellhead price of $16.95/bbl for 1991, down 15.4% from 1990.

U.S. product prices are not showing much weakness despite the demand slump. Even though U.S. demand has fallen for many products refiners have been able to maintain product price levels comparable to last year's. With product exports up sharply in the first half, it appears that worldwide product demand and refining capacities are affecting U.S. product prices more than in previous years.

The OGJ survey of self-service unleaded motor gasoline pump prices shows the average price for the first half of 1991 at $1.165/gal, compared with $1.0455/gal last year. The price at the end of June was $1.1496/gal vs. $1.0581/gal a year earlier. These current year prices include the 5/gal federal tax that didn't exist a year earlier.

The price excluding tax averaged 85.42/gal for the first 6 months of 1991 vs. 79.53/gal in 1990 up 7.4%. For the first 6 months this is consistent with crude prices, which on average were up 6.9%.

Gasoline taxes for the first half of 1991 averaged 31.02/gal, up from 25.02/gal in the same period last year-an increase in taxes of 24.2%.

There is some difference between the U.S. gasoline markets this year and the markets a year ago. A year earlier marketers were able to maintain gasoline prices in May and June, at the start of the driving season, at the same level as the first quarter even though crude prices had plummeted 30%. The price level was sustained due to the surge in motor gasoline demand during the summer months. This helped boost refining margins.

This year the surge in demand has not fully materialized. Refiners, unable to boost summer gasoline prices, have to settle for somewhat smaller margins.

OGJ expects the pump price for all types of motor gasoline, including premium grades, to average $1.25/gal for 1991, compared with $1.217/gal for 1990. All the increase is attributable to the higher federal tax. The U.S. peak pump price came in 1981, when all motor gasoline grades averaged $1.353/gal.

Residential heating oil prices for the first 3 months of 1991 averaged $1.0987/gal, compared with $1.0167/gal in the same period last year. The increase was due mainly to strong demand in January and slightly higher feedstock costs during the first quarter. OGJ expects heating oil prices to average $1.047/gal for the year vs. $1.062/gal last year.

Consumption of natural gas is expected to rise slightly this year as demand stimulated by low prices offsets the effects of recession. The U.S. wellhead price for natural gas will average $1.70/Mcf in 1 991 , compared with $1.72/Mcf last year and $1.69/Mcf in 1988 and 1989.

Gas prices peaked in 1984 at $2.66/Mcf, failing with weakening demand to $1.67/Mcf in 1987. The average annual price has been relatively constant since then, but there have been sharp seasonal swings in price related to seasonal swings in demand.

Natural gas consumption in the U.S. was 17-951 tcf in 1984. It fell to 16.221 tcf in 1986 and rebounded to 18.834 tcf last year.

ENERGY DEMAND

Late in 1990 the U.S. economy went into its first recession since 1982. Economic activity began lagging year-earlier levels in the fourth quarter of 1991 in a trend that continued through first half 1991.

The recession ended a record 8 year period of growth in gross national product (GNP).

OGJ expects economic growth to resume during the second half. For the year, real GNP will decline 0.4% in 1991 following a 0.9% increase in 1990. GNP increased 31.3% during the growth period that ended last year, averaging 3.1%/year.

Energy consumption, which declined in the early 1980s, moved up 15.0% during the growth period, an average rate of increase of 1.8%/year. Last year energy consumption increased 0.2%, following increases of 1.4% in 1989 and 4.4% in 1988.

In recent years energy consumption growth has moved back toward alignment with economic growth. In the 4 years ending with 1990, GNP increased by 11.8%, and energy consumption increased 9.8%. Relatively low energy prices and renewed growth in energy intensive industries boosted energy consumption.

Energy consumption is expected to fall in 1991 due to the slump in economic activity. Total energy consumption will slip 0.3% to 81.21 quadrillion BTU (quads) for 1991. There will be no measurable improvement in overall energy efficiency this year; the decline in GNP will be greater than the decline in energy consumption.

Energy consumption per unit of GNP has been falling since 1970, dropping 29.5% by 1990. From 27,800 BTU/$ of GNP in 1970, the ratio fell to 19,600 BTU/$ in 1990. The ratio will be unchanged this year.

Oil energy demand is expected to slip 1.7% in 1991 to 33.08 quads. Oil's share of total energy demand will also fall, dropping to 40.7% from 41.3% last year and 42.1 % in 1989.

Demand for energy from natural gas will move up 0.1% to 19.44 quads. This follows a 0.2% increase last year. The gas market share will move up to 24% from 23.8% in 1989 and 1990.

Energy from coal will continue to climb on the strength of increased electricity demand. Coal consumption will move up 0.5% to 19.18 quads, and coal market share will rise to 23.6% from 23.4% last year.

Hydroelectric and geothermal energy output will increase 6.4% to 3.35 quads. The market share will move up to 4.1% from 3.9% last year. Hydro power output has been well below capacity the last several years because of drought conditions in the western U.S.

Nuclear energy output will decline by 0.4% to 6.16 quads this year. Nuclear output gained 9% last year. The market share will remain at 7.6% of total energy. Nuclear plant operating rates are expected to drop in 1991 with more intense plant maintenance.

Few new nuclear plants are planned. The slowing of the growth in nuclear power will mean that the electric power industry will have to turn to other fuel sources in the future, most probably coal and natural gas.

OIL PRODUCT DEMAND

Motor gasoline demand slipped 2.0% during the first half, averaging 7.05 million b/d due to the recession and higher prices.

First half distillate fuel oil demand was down 5.4% from a year ago at 2.93 million b/d. Diesel fuel demand suffered from reduced business shipments, and conservation, higher prices, competition from natural gas, and warm weather reduced demand for home heating oil. Prices for residential No. 2 distillate averaged $1.099/gal in the first quarter, up 8% from the same period of 1990.

Demand for residual fuel oil during the first half was down 13.9% from the first half of 1990, averaging 1.14 million b/d. In the electric utility sector consumption of coal and natural gas moved up, while demand for fuel oil fell. The resid demand drop in this sector during January and February amounted to 15.7%.

Second half products demand is expected increase 2.3% from the same period a year ago, averaging 16.83 million b/d. All the improvement will occur in the fourth quarter, with demand up 3.2% at 17.25 million b/d. Fourth quarter 1990 demand was severely depressed by the economic downturn, prices elevated by the Persian Gulf crisis, and weather 10% warmer than normal.

For the year OGJ is expecting demand for petroleum products to average 16.695 million b/d, down 1.7%.

Until 1990, products demand had increased every year since 1983. Demand hit an all time high of 18.847 million b/d in 1978 and then slipped to 15.231 million b/d in 1983 before starting to move back up. Demand reached 17.325 million b/d in 1989. The demand projected for 1991 will about match that of 1987.

Motor gasoline demand will be down for the third consecutive year, averaging 7.16 million b/d vs. 7.235 million b/d in 1990.

Gasoline prices at midyear were up 11% from a year earlier but were still well below the peak prices of the early 1980s.

Gasoline demand has been sliding slowly since 1988, when it averaged 7.336 million b/d. The average slipped to 7.328 million b/d in 1989 and 7.213 million b/d last year. The peak year for motor gasoline demand was 1978 at 7.412 million b/d; the recent low was 6.529 million b/d in 1982. .

Distillate demand will average 2.99 million b/d this year, compared with 3.021 million b/d in 1990. In the fourth quarter alone, however, distillate demand will be up 8.9% from a year earlier at 3.22 million b/d. Some base load demand for home heating oil has been lost to natural gas. Improvements in heating unit efficiency also will suppress demand. Residential distillate demand for the year is expected to be down from 1990.

Residual fuel oil prices during the second half of 1991 are expected to be far below the level a year earlier. The sharp jump in crude oil prices at the end of 1990 pushed the price of residual fuel oil to a level 50% above the previous year. As a result the fuel lost market share to coal and natural gas in a trend that carried into the first half of 1991.

This year the price of natural gas is expected to rebound in the heating season, improving the competitive position of resid. As a result residual fuel oil demand is projected to average 1.19 million b/d for the second half, up 4.8% from the same period of 1990. Demand in the fourth quarter is projected at 1.26 million b/d, up 15% from 1990.

However, due to the weak first half, average demand for the year will be down 5.6% at 1.16 million b/d. Much of the decline will be a drop in consumption by electric utilities, most of which can switch to natural gas or other fuels when the oil price gets too high. In January 1989, the cost of heavy fuel oil delivered to steam-electric utility plants was only 2.6% higher than natural gas on a BTU basis. In January 1990, it was 37.4% higher than natural gas, and this January it was 27.2% higher.

Demand for LPG and ethane is projected to average 1.615 million b/d in 1991, up 3.8% from 1990. Demand during the first half was 1.61 million b/d, up 7.4%. Chemical demand is expected to rebound along with residential/commercial demand with the return to normal winter weather.

Demand for all other petroleum products is expected to fall this year by 6.2% to 2.275 million b/d. Included in this category are petrochemical feedstocks, special naphthas, lubricants, waxes, petroleum coke, asphalt and road oil, still gas, and miscellaneous products. Demand for several of these products is expected to be down, with a substantial drop in petrochemical feedstocks and petroleum coke.

NATURAL GAS

U.S. demand for natural gas is projected to increase 0.1% in 1991 to 18.85 tcf. This follows increases of 0.2% in 1990, 4.3% in 1989, and 4.8% in 1988.

During 1986-90, demand moved up 2.613 tcf. The industrial sector accounted for 61% of the increase, but demand also moved up in the residential and commercial sectors.

This year industrial demand will sag due to the sluggish economy, but residential, commercial, and utility demand increases will offset the decline. Late in the year, a normal winter would boost demand for gas, but competition from low-cost fuel oil would reduce the gain as gas prices increase.

Especially against resid, gas won't enjoy the cost advantage that it did late in 1990. Increased output by hydropower plants also will cut into gas markets. The effect will be partly offset by declining nuclear output.

U.S. marketed production of natural gas is expected to fall in 1991 by 1.5% to 18.2 tcf as demand holds steady and imports rise. Last year production was boosted by a need to replenish storage, which had been drawn down during the cold spell in December 1989.

Imports of natural gas will increase 3.8% in 1991 to 1.57 tcf. Imports from Canada will move up 4.7% to 1.495 tcf. There will also be a small but steady supply of LNG, which will slip to 75 bcf from 84 bcf in 1990.

SUPPLY

The rebound in Alaskan production temporarily reversed a decline in U.S. crude and condensate production during the first half of 1991. Output averaged 7.42 million b/d vs. the 7.386 million b/d average of the same period a year ago.

Alaskan production was up 57,000 b/d, averaging 1.84 million b/d. Lower 48 output averaged 5.58 million b/d, compared with 5.603 million b/d the first half of 1990.

The decline in U.S. crude and condensate production is expected to continue through 1991 and beyond. North Slope production output is expected to slip in future years. The decline in total U.S. output started in early 1986 and accelerated in 1989 because of the Alaskan Valdez oil spill and in 1990 because of the Alaskan maintenance projects.

Alaskan production was as high as 2.031 million b/d during first half 1988. The completion of the maintenance projects has not reversed the natural decline in Alaska.

U.S. production, resuming its general decline, will average 7.26 million b/d in the second half-1.8 million b/d from Alaska and 5.46 million b/d from the Lower 48. Production in the Lower 48 will continue to slide through the year, dipping to 5.4 million b/d in the fourth quarter.

Increased drilling in 1990, enhanced recovery, and new technology helped slow the U.S. decline rate in 1991, but drilling isn't high enough to reverse the downward trend. The boost in crude oil prices in late 1990 injected some additional funds into the industry but only for a short period.

U.S. production reached a recent peak of 8.971 million b/d in 1985 and averaged 9.108 million b/d during the first quarter of 1986. Production had been pushed up in the early 1980s due to increased drilling activity and increased North Slope output. Production has been sliding since 1986 due to the sharp decline in drilling and the recent start of a decline in North Slope production.

Alaskan output is expected to average 1.82 million b/d this year, compared with 1.774 million b/d in 1990. The peak was 2.017 million b/d in 1988. Lower 48 output for all of 1991 will dip to 5.52 million b/d from 5.582 million b/d last year.

Production of natural gas liquids and other hydrocarbons averaged 1.74 million b/d in the first half of 1991, up 8.9% from the same period a year before. It will average 1.7 million b/d for the year, up 3.7% from 1990. This will boost U.S. total liquids production to 9.04 million b/d for 1991, an increase of 0.5% from the year before. This is the first year-to-year increase in total liquids output since 1985. However, total production will still be down 15% from the 10.636 million b/d in 1985.

IMPORTS

This year's expected decline in crude and product imports will be the second in a row.

Last year a drop in domestic consumption and a drawdown of stocks led to a 14,000 b/d reduction in total industry imports. Helping was the emergency drawdown of the Strategic Petroleum Reserve, which contributed 11,000 b/d to supply and continued into the first half of 1991.

In that period, total imports, excluding crude for the SPR, averaged 7.39 million b/d, down 12.7% from 1990. Imports are expected to average 8.030 million b/d in the second half, bringing the average for the year to 7.71 million b/d, down 3.5%. This follows an 0.2% decline in 1990.

The peak year for industry imports was 1977 when the average was 8.786 million b/d. Industry imports dipped to a recent low of 4.949 million b/d in 1985 as a result of an increase in domestic production and a decrease in product demand. Imports moved back up to 8.005 million b/d in 1989 but have retreated in the past 2 years due to weak demand.

This year, crude imports, excluding the SPR, will increase 0.7% to 5.91 million b/d following a 1.4% increase last year. During the first half this year they averaged 5.7 million b/d, down 7.5% from first half 1990.

Crude imports by the government for the SPR will average 25,000 b/d if fill is resumed in the second half. There were no SPR imports in the last 4 months of 1990 and the first 4 months of 1991. SPR imports had averaged about 55,000 b/d prior to the conflict in the Persian Gulf.

Product imports will fall 15.3% to 1.8 million b/d this year. During the first half product imports averaged 1.69 million b/d, down 28% from the first half last year. Increased demand in the second half, particularly for residual fuel oil, is expected to boost product imports to 1.91 million b/d, up 0.4% from last half 1990. With little excess capacity at U.S. refineries upward movement in product demand results in increased product imports.

The leading source of crude imports during the first quarter of this year was Saudi Arabia at 1.639 million b/d, up 37.2% from the first quarter of 1990. Crude imports from Saudi Arabia averaged 1.195 million b/d for all of last year. They were as low as 131,000 b/d in 1985.

Total crude imports from the OPEC countries averaged 3.129 million b/d for the first quarter, down 11% from the same period a year earlier. Crude imports from OPEC moved up 4.1% in 1990 to average 3.514 million b/d for the year. Crude imports from OPEC represented 59% of the total in the first quarter this year. Crude imports from OPEC were only 41% of the total in 1985, averaging 1.312 million b/d.

First quarter product imports were down 28.6% at 1.516 million b/d. Venezuela was the leading source at 324,000 b/d, but this was down 9.7% from a year earlier. Product imports from OPEC averaged 623,000 b/d, down 20.4% from first quarter 1990.

STOCKS

Industry stocks have moved up since yearend 1990 but are slightly below year ago levels. At midyear crude stocks were an estimated 350 million bbl, up from 323 million bbl at yearend 1990 but down 8.9% from the 384 million bbl at the end of June 1990.

At the end of the first half of this year product stocks were at 730 million bbl, up from 712 million bbl at yearend 1990 and 714 million bbl at the same time last year.

Product stocks have been boosted in 1990 and 1991 even though product demand has slumped.

Last year the lower crude oil prices during the second quarter encouraged refiners to carry additional inventory to meet the seasonal upswing in demand expected later in the year. When crude prices moved up refiners reduced stocks to minimum operating levels related to demand.

Total industry stocks at yearend 1989 represented only 57.9 days of supply at 1989 demand levels. At yearend 1990 this had risen to 60.9 days of supply at 1990 demand levels. By midyear this year stocks had moved up to 66.3 days of supply at current demand levels. At yearend stocks are projected at 62.3 days of supply.

There have been no SPR crude imports since August 1990. At midyear SPR stocks stood at 568 million bbl, down 3.2% from a year earlier. If SPR imports are resumed at the past rate of 55,000 b/d it is expected that the SPR stocks will move up to 578 million bbl at yearend 1991. This would still be below the peak of 590 million bbl at end September 1990.

WORLDWIDE TRENDS

Absence of significant spare production capacity is a key feature of the 1991 worldwide oil market.

According to latest estimates by the U.S. Central Intelligence Agency, OPEC without Kuwait and Iraq has sustainable production capacity of 22.84 million b/d and available capacity of 23.44 million b/d.

IEA estimated OPEC crude production in the first quarter of 1991, excluding Iraq, averaged 22.9 million b/d-about the sustainable capacity level estimated by CIA.

Demand for OPEC crude isn't expected to exceed capacity estimates until the fourth quarter, when IEA sees it averaging 24 million b/d absent stock change.

Weak worldwide demand during the first half led to weakness in crude prices. According to the U.S. Energy Information Administration the average price of world export crude oil was $24.24/bbl the first week of 1991. The average export price for OPEC crude was $23.86/bbl. By the week of June 14 the average world export price was down to $16.05/bbl, and the average OPEC export price was down to $15.81/bbl.

The stated OPEC goal was to stabilize prices for a basket of seven world export crudes at $18-20/bbl. The average price for these seven crudes was $25.95/bbl the first week of 1990. It had fallen to $17.29/bbl by the week of June 22.

With OPEC not wrestling with as much excess capacity as usual, the price outlook depends more on demand in industrial countries and stock management in the Northern Hemisphere winter.

IEA says stocks held by members of the Organization for Economic Cooperation and Development as of Apr. 1 were 3.358 billion bbl, down 44 million bbl from Jan. 1 and down 29 million bbl from Apr. 1, 1989. Apr. 1 stocks represented 100 days of consumption, compared with 96 days as of Jan. 1.

Industry stocks, however, represent only 70 days of supply vs. 69 days a year earlier. Industry stocks have amounted to 67-70 days of forward consumption for the past 6 years. If refiners choose to work off some of these stocks demand for OPEC oil could be reduced. However, the stock level appears consistent with demand, and withdrawals probably will not be extensive.

According to IEA, first quarter worldwide oil production was down 1.3% from the level a year earlier, averaging 67 million b/d.

OPEC output was 25 million b/d, down from 25.7 million b/d in 1990.

Non-OPEC production fell 200,000 to 42 million b/d. This included a 1.1 million b/d drop in U.S.S.R. output to 10.9 million b/d. Other non-OPEC output gained, largely on the strength of increases in Norway and Mexico.

IEA projects a 100,000 b/d decline in worldwide demand for petroleum products to 65.6 million b/d. This includes a projected 400,000 b/d drop in North American demand and a 500,000 b/d drop in U.S.S.R. demand. The largest increase will be in Asia, up 400,000 b/d. Demand in Western Europe is expected to move up 200,000 b/d.

IEA is projecting a 400,000 b/d drop in non-OPEC supply to 41.3 million b/d. This will mean that an additional 300,000 b/d will have to come from stocks or from OPEC.

With demand constant, stocks probably won't change much in 1991.

This translates into demand for OPEC crude oil and NGL averaging 24.3 million b/d for the year. This is down 700,000 b/d from the IEA estimate of 25.0 million b/d for OPEC output in 1990.

Last year IEA estimates show that 1 million b/d went into inventory. Demand for OPEC oil rose accordingly. Projections for this year assume no stock build and thus no corresponding call on OPEC oil.

Total OPEC liquids output averaged 25.1 million b/d in the first quarter. Total second quarter demand for OPEC oil will be the lowest for the year at 23.1 million b/d.

Demand for OPEC oil will then move up to 23.4 million b/d in the third quarter and 25.9 million b/d in the fourth quarter.

If actual demand for OPEC oil moves up to levels similar to that anticipated by the IEA, crude prices could begin to move up as demand for OPEC oil increases in the third and fourth quarters.

IEA expected recessions in the U.S. and Canada to have ended by midyear, with a second half recovery boosting North American demand in the fourth quarter. If so, crude price increases are likely as refiners search for supplies to meet anticipated winter demand. With limited OPEC excess capacity a surge in demand could result in a sharp spike in prices. However, if crude prices move up too rapidly refiners could choose to reduce stocks and risk running with closer to minimum operating inventories.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.