Oil price slide worsens as glut fear grows

The price for Brent crude oil has reached its lowest value since August 1996 in London trading last week, as the mild winter and rising crude supplies weakened traders' confidence. Brent crude for April delivery reached a recent low of $20.10/bbl during trading in London Feb. 18 but rallied to close at $20.50/bbl. Brent blend for dated delivery closed at $20.69/bbl. While the price descended only slowly after an up-and-down period the prior week, there is growing acceptance that

Feb. 24, 1997

4 min read

The price for Brent crude oil has reached its lowest value since August 1996 in London trading last week, as the mild winter and rising crude supplies weakened traders' confidence.

Brent crude for April delivery reached a recent low of $20.10/bbl during trading in London Feb. 18 but rallied to close at $20.50/bbl. Brent blend for dated delivery closed at $20.69/bbl.

While the price descended only slowly after an up-and-down period the prior week, there is growing acceptance that stockbuilding has begun and crude prices are set to fall further.

Blip or trend?

London's Centre for Global Energy Studies (CGES) asked rhetorically, "Is the recent $4/bbl drop in oil prices, coincidental with the build-up in Iraqi production, a mere blip or the precursor of a downward trend?"

CGES said the weather has been milder than anticipated, yearend 1996 distillate stocks were higher than a year before, and industry is about to enter a period of refinery outages for maintenance, first in the U.S., then in western Europe and the Far East.

"With OECD (Organisation for Economic Cooperation and Development) company stock cover expected to come much closer to normal levels during the current quarter," said CGES, "it is small wonder that oil prices have been weakening."

CGES said refiners typically draw on stocks in the first quarter, with an average stock draw of 1.7 million b/d taking place in the previous 3 years: "But in first quarter 1997, we seem to be heading for a zero stock change, possibly even a tiny stock build."

Higher OPEC output

With Iraqi oil sales in full swing, CGES reckons members of the Organization of Petroleum Exporting Countries may be producing a little too much for comfort (see related story, this page).

"OPEC's output in January increased further to around 26.9 million b/d," said CGES, "with Iraqi production at 1.1 million b/d. This time, however, prices fell, which might prove significant."

Oil prices need not be heading for a heavy fall, contends CGES. Any further fall may be modest, if OPEC holds output at current levels and non-OPEC grows by 500,000 b/d less than the 2 million b/d predicted by International Energy Agency.

Higher prices unlikely

"There is, however, one issue of which one can be reasonably certain," said CGES. "The price of oil is unlikely to return to a rising trend.

"For that to happen, global oil demand will have to be even stronger than we have assumed, and Iraq's limited oil sales agreement with the U.N. will have to be terminated when it comes up for renewal in June."

CGES' reference case forecast for OPEC basket crude oil prices is an average of $22/bbl in the first quarter, $20.60/bbl in the second quarter, $18.20/bbl in the third quarter, and $17/bbl in the fourth quarter.

If OPEC production is kept steady, CGES predicts OPEC basket crudes will average $22.20/bbl in the first quarter, $21.10/bbl in the second quarter, $19.60/bbl in the third quarter, and $19.90 in the fourth quarter.

But if more non-OPEC production comes on stream than expected, CGES anticipates OPEC basket crude prices could average $21.90/bbl in the first quarter, $19.40/bbl in the second quarter, $16.40/bbl in the third quarter, and $15.20/bbl in the fourth quarter.

"If incremental non-OPEC production materializes as planned, and non-OPEC output increases, on average by 1.9 million b/d in 1997," said CGES, "then prices are set to weaken considerably in the second half of the year.

"With stocks substantially above desired levels, an OPEC basket price of little more than $15/bbl in fourth quarter 1997 is not impossible, yielding an annual average price of $18.20/bbl."