Oil price surges as market anticipates continued OPEC restraint

The price for Brent crude is now hovering above a level last seen in 1996, which was in turn its highest point since the Gulf War, but the industry is not starting the field development bandwagon rolling again just yet.

While producers outside the Organization of Petroleum Exporting Countries will be pondering whether or not the time is right to dust of plans for some of their field developments, London's Centre for Global Energy Studies is concerned that OPEC should be prepared to raise its output targets in a bid to prevent the oil market from over heating.

"Intoxicated by their success in raising prices," said CGES, "some OPEC members are trumpeting the notion that OPEC should not increase its output.

"Significantly, perhaps, Saudi Arabia has so far declined to join the roll-over chorus, stating sensibly that it wants to keep its options open; yet it could have gone further.

"What is crystal clear to us is that a roll-over will lead to oil prices not seen since the Kuwaiti crisis of 1990. OECD (Organization for Economic Cooperation & Development) company stock cover at 45 days' worth in the fourth quarter 2000 - unless government held inventories are released - goes with $35/bbl oil.

"Besides the adverse effect on OPEC's own prospects, the detrimental global macroeconomic consequences of such high oil prices would be serious indeed."

The current buoyancy of the oil price is accompanied by jitters rather than confidence among traders. For example, at the close of London trading on Nov. 15, dated Brent crude stood at $25.94/bbl while December delivery Brent was $24.96/bbl. The surge was attributed to calls from OPEC ministers to maintain their cutbacks pledge beyond March.

However, by close of business on Nov. 16 dated Brent had fallen to $24.86/bbl and January delivery Brent opened at $24.50, as news spread of a hike in total production by OPEC member countries during October.

CGES said that the recent inventory reductions continued into October, taking stocks in the US and Europe down by the equivalent of 800,000 bo/d.

"Going into the fourth quarter," said CGES, "with industry forward stock cover on a par with the situation in 1996 sends out a clear message that the market will be tight, despite a 6% weakening in OPEC's compliance rate since early summer."

The latest OPEC production estimates from Middle East Economic Survey show that OPEC produced an average of 26.21 million bo/d in October, up from 26,130 million bo/d in September.

The ten OPEC members which pledged in March to hold back output in a bid to bolster oil prices produced a total of 23.7 million bo/d in October, according to MEES, up from 23.3 million bo/d in September and still above the target of 22,976 million bo/d (see table below).

CGES said that supply/demand data suggested that global oil inventories should have declined by 235 million bbl during Jan. 1-Sept. 30, 1999, but that only 20% of this total had actually been identified in OECD figures for the period.

"This is why some OPEC ministers feel compelled to talk about maintaining current output levels," said CGES. "They fear that any discussion of a production boost next year would trigger a price collapse."

But CGES reckons that company stock cover in the OECD is falling rapidly, and that refiners could hit their minimum operational stock level requirement of 50 days' cover some time in the first quarter of 2000.

"More OPEC oil is needed next year to halt the stock-draw," said CGES. "The crisis-induced postponement of new Norwegian oil fields is now at an end and new fields already on stream should add at least 450,000 bo/d in 2000.

"However, the older Norwegian fields are in decline, leaving a net increase of 220,000 bo/d next year. To this we must add 450,000 bo/d of incremental supplies from Africa and North America and 300,000 bo/d from the rest of the world.

"As a result, non-OPEC oil supply is expected to grow by 1 million bo/d next year, in line with the anticipated increase in global demand. However, the likely balance between incremental demand and non-OPEC supply does not mean that more OPEC oil will not be needed.

"Since equal increments are added to both sides of an existing global excess demand position, the excess demand will be repeated next year, the resultant stock draw taking company stock cover to perilously low levels."

The analyst fears that, if OPEC maintains its current output pledge when it meets in March 2000, the market could enter a "dangerously unstable" situation, with the dated Brent price soaring to an average $35.4/bbl during the fourth quarter 2000.

CGES believes that maintaining its position is not an option for OPEC in March, since high oil price would encourage new non-OPEC developments, starting the whole boom-bust cycle all over again.

"A decision by OPEC to increase output by 2 million bo/d, in line with the zero stock change call on its oil next year, from the start of the second quarter 2000 would set oil prices on a gently declining trend," said CGES, "with Brent reaching $18/bbl on average in the fourth quarter 2000 and yielding an average price for the year of $20/bbl."