CGES: First quarter tight, but $16/bbl oil price looms

Despite the resumption of limited exports of Iraqi oil, global oil markets remain vulnerable to a supply shortage or another long, cold winter, and prices are likely to remain strong in first quarter 1997.

This is the view of London's Centre for Global Energy Studies (CGES), which said the long list of customers lifting relatively small amounts of Iraqi oil suggests that many companies are keen to establish good relations with Iraq with an eye to the longer term.

Capacity tight

CGES said spare global oil production capacity available to meet a crisis is currently low, at about 5% of world oil consumption, suggesting that the market is fundamentally tight.

"With only 5% excess capacity," said CGES, "and Saudi Arabia along with Kuwait and U.A.E. reluctant to use some of their available surplus to dampen price fluctuations, the oil market remains vulnerable to supply shortages and the capriciousness of the weather."

If producers outside the Organization of Petroleum Exporting Countries fail to match production expectations-as they did last year-the price for OPEC basket crude is likely to stay well above $20/bbl, CGES said.

But by the summer, non-OPEC producers are expected to increase total production capacity by 1.7 million b/d, matching expected incremental global oil demand and leaving little extra room for increased OPEC output.

By that time, OPEC is expected to have raised total production by 900,000 b/d, said CGES, which can only be absorbed into stock at much lower prices.

$16/bbl oil?

"With OECD company stock cover in second half 1997 expected to gain 4 days over the first half," said CGES, "$16/bbl oil cannot be far away."

CGES expects OPEC's crude oil basket price to average $23.80/bbl in first quarter 1997, $20.80/bbl in the second quarter, $17.20/bbl in the third, and $15.60/bbl in the fourth.

If anticipated non-OPEC output rises fail to materialize, CGES predicts OPEC crude oil basket price will average $24.40/bbl in the first quarter, $22.70/bbl in the second quarter, $21.30/bbl in the third quarter, and $22/bbl in the fourth quarter.

But if OPEC members produce even more above their quotas, CGES reckons the price for OPEC's basket of crudes will average $23.80/bbl in the first quarter, falling away to $20.50/bbl in the second, $16.20/bbl in the third, and $13.40/bbl in the fourth.