Oil supply, demand surge continued in 1996

Significant new oil supplies have come on stream worldwide as global oil demand continues to surge, according to the latest review of world oil trends by Cambridge Energy Research Associates and Arthur Andersen LLP.

But critical challenges still face the industry in months and years ahead, including finding and developing more supplies, improving efficiency gains of recent years, meeting new environmental standards, and coping with political uncertainty (see related story, p. 36).

OPEC's gains

According to the study, total world crude oil production grew by 1.81 million b/d in 1996 to 62.75 million b/d.

Crude oil production by Organization of Petroleum Exporting Countries reach- ed its highest level since 1980, averaging 25.77 million b/d, a 3.1% increase from 1995 and the highest increase in 4 years.

Much of the output increase came from Vene- zuela, where output rose by 370,000 b/d. Smaller increases occurred in Nigeria, up 150,000 b/d; Algeria, up 40,000 b/d; Indonesia, up 20,000 b/d; and Qatar, up 40,000 b/d.

The largest OPEC producers-Saudi Arabia, Iran, United Arab Emirates, and Kuwait-all kept 1996 output close to 1995 levels.

In addition to a 780,000 b/d rise in overall OPEC crude oil production, the group's output of natural gas liquids and condensate was up by 70,000 b/d in 1996, averaging 2.61 million b/d.

"OPEC as an organization was conspicuously absent from the world political scene during most of 1996," aside from speculation over when Iraq would return to the oil market, the report observed.

The combination of higher prices, rising demand, and significantly higher-than-expected revenues provided little incentive for the organization or any of its individual member states to raise their profile."

However, dissent within OPEC increased in 1996, with Gabon dropping out of the organization, following Ecuador's exit in 1993.

And while most members generally observed production quotas that have not changed since September 1993-except for Iraq-Venezuela was accused by fellow OPEC members of surpassing assigned output by as much as 800,000 b/d at yearend.

But with prices high and demand strong,"open discussion on this issue by OPEC was muted," the report noted.

Non-OPEC gains

Non-OPEC output rose for the third year in a row, increasing 710,000 b/d to 36.98 million b/d.

For the seventh year in a row, western Europe was the strongest regional gainer among non-OPEC producers, with record output of 6.29 million b/d.

The region's increase was led by an 8.7% output increase in the North Sea. Norway's output rose by 320,000 b/d to 3.1 million b/d, while U.K. production increased 110,000 b/d to 2.6 million b/d.

Production also rose in the Gulf of Mexico, but this did not stem the continued U.S. decline in output, which fell 1% to 6.49 million b/d. Nevertheless, the Gulf of Mexico "will become an increasingly important producing area in the United States because of technological advances that have made production in very deep waters both possible and profitable," the report said.

Other significant non-OPEC developments included:

* Rising output in Mexico, up by 250,000 b/d; and Latin America overall, up 150,000 b/d.

* The smallest production decline in 8 years in the former Soviet Union, 10,000 b/d.

* Increasing output in Africa, notably Angola, up 60,000 b/d, as peace returned; Congo, as offshore N'Kossa field came on stream; and Equatorial Guinea, which joined the ranks of oil producers, with production of 40,000 b/d by yearend 1996.

Demand trends

Worldwide demand rose for the 13th consecutive year, posting the largest volumetric gain since 1988 at 1.76 million b/d, or 2.5%.

Demand in 1996 also posted a record average of 72.22 million b/d.

Demand in the Asia-Pacific region led the growth, rising 4.6% from 1995 to 18.71 million b/d. Latin America followed, with a 3.7% year-to-year gain to 4.45 million b/d. North American demand rose by 2.7% to 22.32 million b/d, driven by colder-than-normal winter weather. Demand in western and eastern Europe was virtually flat at 14.16 million b/d and 1.35 million b/d, respectively.

Demand in the former Soviet Union fell by 4.3% to 4.62 million b/d, less than half the 1983 peak level.

Refining trends

World refining capacity increased by 1.7% to 77.5 million b/d, as new projects came on stream in South Korea, Thailand, Malaysia, and Indonesia. Total refinery capacity in the U.S. did not decline, although six refineries were closed.

Refining margins continued the generally weak trend of recent years. Very severe winter weather in the northern hemisphere in first quarter 1996 led to some temporary strength in middle distillate and kerosine markets, but this did not last long.

Gasoline-to-crude oil price differentials were generally weak in all markets, primarily due to rapid capacity additions in Asia, combined with weak demand growth in North America and Europe. In response to weak margins, North American and European refiners continued the trend toward cutting costs and consolidation.

Oil prices jumped on average by $3-3.70/bbl in 1996, reaching the highest level since 1990.

As a result, total revenues were $78-96 billion higher than they would have been had prices stayed at 1995 levels, the report said.

The average price of West Texas intermediate (WTI) spot crude was $22.09/bbl in 1996, up by $3.66/bbl, or 19.9%. Brent spot crude averaged $20.63/bbl, up $3.60/bbl or 21%, while Saudi Arabian spot light averaged $19.84/bbl, up $3.03/bbl, or 18%.

During fourth quarter 1996, fears of low heating oil stocks triggered panic buying and speculation in the futures markets, pushing average prices for the quarter to $24.60/bbl for WTI and $23.60 for Brent.