WORLD OIL FLOW SHOWS INCREASE FOR FIRST HALF

Robert J. Beck
Economics Editor

World crude oil and condensate production during first half 1990 moved up 5.1% from last year's first half.

Production averaged 61.414 million b/d this year, a 2.97 million b/d advance.

Most of the increase came from members of the Organization of Petroleum Exporting Countries, whose first half 1990 production averaged 23.944 million b/d, up 14.9% from first half 1989. That won't be the case in second half 1990, with more than 4 million b/d of Iraqi and Kuwaiti oil under embargo.

Non-OPEC flow outside Communist areas also advanced in the first half but at a slower pace, increasing 1.7% to 22.607 million b/d. Communist area production continued to slide, falling 3.3% to 14.863 million b/d because of a decline in Soviet oil flow,

The sharp jump in OPEC production boosted its share of world and non-Communist production.

OPEC's share of nonCommunist flow rose to 51.4% from 48.6% a year ago and 44% in first half 1988. The group's share of total world production moved up to 39% from 35.7% in 1989. The non-OPEC, nonCommunist share dipped to 36.8% from 38%, and the Communist share fell to 24.2% from 26.3% a year ago.

In 1979 OPEC production accounted for 63.4% of nonCommunist production and 49.1% of total world flow. This dropped to 41.4% of non-Communist and 29.9% of total world in 1985.

OPEC's share of the market has been moving back up since then.

During first half 1990, OPEC production averaged 1.858 million b/d, or 8.4%, more than the group's quota of 22.086 million b/d. This excess production kept downward pressure on crude oil prices during the first half.

NON-OPEC PRODUCTION

First half 1990 saw a small increase in non-OPEC nonCommunist production, which moved up 386,000 b/d, or 1.7%, to average 22-607 million b/d.

Eleven countries posted increases of 20,000 b/d or more. This was led by the U.K. with an increase of 241,000 b/d. U.K. oil flow rose 14.5% to 1.9 million b/d for the first half of this year. U.K. production last year was trimmed by accidents and slowdowns for platform maintenance.

Norway followed the U.K. in production gains, increasing its oil flow 162,000 b/d to an average 1.6 million b/d for the first half.

Australia boosted production 107,000 b/d above the level a year ago, moving up to 578,000 b/d.

Sizable increases were also posted by Brazil, up 73,000 b/d, Syria 60,000 b/d, Oman 45,000 b/d, Colombia 44,000 b/d, and Malaysia 41,000 b/d.

Elsewhere, there was a 427,000 b/d drop in U.S. production. There also were declines of 44,000 b/d in Canada and 24,000 b/d in Mexico.

In the U.S., a low level of drilling activity failed to arrest declining production in the Lower 48. Alaskan production also continued to slip, falling to 1.781 million b/d for first half 1990, off 107,000 b/d from first half 1989. Maintenance work on production stations and the trans-Alaskan pipeline contributed to the lower rate.

OPEC PRODUCTION

OPEC boosted its production quota to 22.086 million b/d from 20.5 million b/d for first half 1990. But it continued to overproduce its quota.

All OPEC members except Qatar posted production increases. The Neutral Zone, where production is shared equally by Saudi Arabia and Kuwait, also posted a decline.

The largest increase occurred in Saudi Arabia with a gain of 746,000 b/d to an average 5.499 million b/d. U.A.E. production moved up 464,000 b/d to 2.068 million b/d. Kuwait increased its flow 375,000 b/d to 1.809 million b/d. Venezuela's production rose 361,000 b/d to 2.024 million b/d, and Iraq increased output 336,000 b/d to 3.1 million b/d.

OPEC production in the first half was 1.858 million b/d above quota.

U.A.E. flow was 973,000 b/d above its assigned ceiling. Kuwait exceeded quota by 309,000 b/d. Nigeria's production was 155,000 b/d over quota, and Saudi Arabia's was over by 119,000 b/d.

Indonesia was 115,000 b/d below its quota. Iran was 90,000 b/d below quota and Iraq 40,000 b/d below.

An increase in world demand and a buildup in crude stocks in the industrial countries triggered the sharp increase in OPEC production in the first half.

Refiners jumped at the opportunity to increase stocks at relatively low crude oil prices during the first half in anticipation of higher prices later in the year.

OIL PRICES

OPEC quotas were set at a level expected to balance supply and demand and support a price close to the group's target of $18/bbl for its reference price based on a basket of seven crudes. But overproduction put the target out of reach in first half 1990.

The average price of world export crude oil started the year at $19.27/bbl. It slid throughout the first half to a low of $13.49/bbl in June.

Then the price started to move up in July, partly on the strength of an expectation of an agreement by several Persian Gulf states to match production rates to quotas. The price averaged $14.93/bbl for the month.

The latest available figure is for the week of Aug. 17, in which the price has jumped to $24.86/bbl due to the absence of Iraqi and Kuwaiti exports.

OPEC's reference price averaged $20.72/bbl in January. But it had slipped to $14.33/bbl in June. The week of August 17th it was up to $26.13/bbl.

OUTLOOK

The invasion of Kuwait by Iraq has made it very hard to predict what will take place during the rest of this year.

Loss of 4.2 million b/d of exports from Kuwait and Iraq has driven up the price of crude oil and products. This will help rein demand in the second half of the year.

The latest International Energy Agency forecast of nonCommunist demand, made before the Aug. 2 invasion, called for second half consumption of 53.95 million b/d, up 1.05 million b/d from the same period a year ago.

Demand was predicted to move up to 55.3 million b/d in fourth quarter 1990 and continue rising to 55.5 million b/d in first quarter 1991.

Assuming no stock change, demand for OPEC oil in second half 1990 was expected to average 23.45 million b/d. Demand for OPEC oil would be 22.3 million b/d in the third quarter, then advance to 24.6 million b/d in the last period of 1990 and 24.9 million b/d in first quarter 1991.

However, with the loss of Iraqi and Kuwaiti supplies, OPEC capacity has been reduced to an estimated 22.3 million b/d. So there is a potential shortage in the fourth period of 1990 and first period of 1991 of nearly 2 million b/d.

What happens will depend largely on how stocks are used.

A reduction in stocks could make up for some of this shortage.

If a shortage does develop it will put upward pressure on prices. Higher prices in turn would tend to reduce demand as consumers adopt conservation measures and look for other fuels.