OGJ NEWSLETTER

The long steadiness of oil prices in recent weeks has broken with OPEC's decision to roll over the current 22.3 million b/d ceiling into the third quarter. Although expected, the lack of action at the June 4 ministerial meeting in Vienna in a soft market added to traders' concerns over stockbuilds of crude, distillates, and gasoline.

June 10, 1991

7 min read

The long steadiness of oil prices in recent weeks has broken with OPEC's decision to roll over the current 22.3 million b/d ceiling into the third quarter.

Although expected, the lack of action at the June 4 ministerial meeting in Vienna in a soft market added to traders' concerns over stockbuilds of crude, distillates, and gasoline.

Brent for 15 day delivery fell 90 on the week to $18/bbl after the June 4 meeting. The meeting was marked by a rare outbreak of public unanimity, a reflection of recent rapprochement between Saudi Arabia and Iran. Outgoing OPEC Pres. Boussena, a staunch advocate of higher prices through production restraint, expressed disappointment the $17/bbl OPEC marker was well short of its $21/bbl target. Saudi Oil Minister Nazer continues to back $21/bbl but refuses to impose it on the market by creating a shortage. OPEC ministers will meet again in Vienna in early September to gauge the fourth quarter supply/demand balance.

OPEC economists see the call on OPEC oil unchanged at 22.8 million b/d in the third quarter and up to 23.7 million b/d in the fourth quarter. Nobody at the meeting expects exports from Kuwait or Iraq to play any part in the market in 1991, spelling quota hikes for all other members in the fourth quarter.

There is some comfort for OPEC ministers worried about large stock volumes overhanging the market. IEA reported crude held in floating storage or unsold producer owned stocks fell last month, the first time since September 1990. At the end of April 130 million bbl was in floating storage. A 10-15 million bbl drawdown in May occurred as such countries as Taiwan, South Korea, and Brazil began to deplete precautionary stocks built during February-April. Onshore OECD stocks are showing no sign of decline, with preliminary IEA figures for Apr. 1 of 3.358 billion bbl, equivalent to 100 days' forward consumption.

There may be agreement within OPEC on oil markets but not among analysts. Citing restored North Sea output, prospect of restored Kuwaiti/Iraqi exports and lagging demand this summer Salomon Bros. expects crude prices to drop $2-4 the next 6 weeks.

Kidder, Peabody sees a bullish second half for oil prices, citing a modest recovery in the U.S. economy and continued efforts by a Saudi led OPEC to calibrate sales to meet demand, even to the point of amending quotas to accommodate return of Iraq and Kuwait to the market in the months ahead. That will put OPEC's marker at $21/bbl in the fourth quarter, it contends.

Merrill Lynch sees oil prices weakening with sluggish demand nd rebounding stocks in the near term but a yearend turnaround with a call on OPEC oil at 24 million b/d in the fourth quarter as Iraqi/Kuwaiti output remains low and Soviet production continues to falter while demand recovers sharply, spiking WTI to $25/bbl by yearend.

Iraq is the real wild card for 1991 because its constraints are political and not physical as they are in Kuwait.

The U.N. has set a 30% cap on Iraqi oil revenues for war reparations, although the U.S. and Kuwait favor 50%. Once U.N. sanctions against Iraq are lifted--not likely soon because of U.S. and U.K. opposition in the Security Council while Saddam remains in power and the key U.N. condition of Iraq destroying its weapons of mass destruction--a defanged Iraq must walk a tightrope to maximize-oil revenues, knowing producing at capacity might only invite another Saudi led price drop, while buoying prices might mean accepting a quota below well capacity.

IEA wants strengthened government control over emergency stocks and/or government owned or controlled stocks above the current 90 day level. A ministerial meeting in Paris last week also asked member states to improve efficiency of demand restraint measures. The Persian Gulf crisis showed some members had not respected fully their commitment to a full 90 days of stocks as well as a need to reevaluate the mix of crude vs. product stocks, says IEA Executive Director Helga Steeg.

Meantime, in Brussels, European Community energy ministers rejected the idea of EC management of oil stocks in a future oil crisis (see story, p. 15). In rejecting a proposal from EC staff, ministers said IEA emergency measures worked well and there is no need for a second tier of emergency procedures.

Energy woes continue to bedevil the U.S.S.R. and its former satellites. Moscow ordered gasoline rationing to begin in Kiev June 1. Owners of Volga autos will be limited to 60-80 l./month, smaller Moskvich and Zhigulis 50-60 l./month, tiny Zaporozets 30-40 l./month, and motorcycles 15-20 l./month. Meantime, Leningrad filling stations ran out of gasoline for several days last week. Fuel shortages are also cropping up in eastern Siberia and in the Kuban agricultural region north of the Caucasus.

Bulgaria and Poland have taken extreme measures to reform their energy sectors. Sofia last week announced energy price hikes of 70-113% in a bid to encourage western companies to sell gasoline in Bulgaria. Premium gasoline jumped to $1.60/gal from 84 and diesel to 96/gal from 64, while prices for natural gas jumped 113% and coal and electricity 70%.

Sofia expects the move to end gasoline rationing and the sight of autos lined up for days to buy 10 gal with ration coupons. Later this month state owned Petrol plans to privatize 300 of its 540 service stations for $100,000-156,000 each.

Meantime, IEA has praised Poland's energy price hikes as courageous. Warsaw recently hiked prices 140% for natural gas and 110% for electricity, sparking protests by Solidarity.

An IEA report written before the hikes suggested a seven-fold jump in gas prices and tripling electricity prices, equalizing Polish energy prices with those in the West by yearend 1995. Poland wants to cut its heavy dependence on coal--with 75% of the energy mix--find non-Soviet sources of oil and gas, and improve energy efficiency while reducing pollution.

Northwest China's remote Tarim basin continues to hold great promise. Two recent oil and gas strikes possibly on the same structure in the northern portion of the basin yielded flows of about 2,800 b/d and 10.2 MMcfd and 2,170 b/d and 19.5 MMcfd.

Alberta will open an office in Beijing in August to promote energy-related training and trade. The provincial government says the office will help Alberta companies market equipment and expertise and provide training for Chinese workers.

Initial training programs are planned on horizontal drilling and natural gas operations. Other programs planned include heavy oil, reservoir engineering, pipelines, and business management. Alberta firms will bid to operate programs.

Colombia and Venezuela have set 1993 as the target date for completing the first gas pipelines linking the two nations.

Plans call for a 510 km, $500 million system either from Zulia state in western Venezuela to La Guajira department in Colombia or from Casigua in Venezuela's Tachira state to Colombia's North Santander department. Amilkar Acosta, Colombian vice-minister of mines and energy, says Colombia plans to buy 60-200 MMcfd of Venezuelan gas starting in 1993, depending on output levels from Colombia's recent Cusiana gas strikes. He expects feasibility studies on the line to be complete by August, with construction to begin in first quarter 1992. Financing will be worked out by yearend, with loans sought from Inter-American bank, European International Bank, and Andean Development Corp.

Worldwide reserve replacement costs fell 4% in 1990 to $4.35/bbl of oil equivalent, says John S. Herold Inc. In the U.S., the average of $4.99/BOE set a 17 year low when adjusted for inflation. Outside the U.S., 1990 costs for a group of 76 companies studied was $3.97/BOE. It's doubtful industry can improve much on these levels, the analyst says. Costs cover proved and unproved reserves and include exploration, development, and property acquisitions. Herold's analysis shows a continuing flow of capital away from the Lower 48 to better prospects abroad and offshore. And given current upstream economics, especially in the U.S., capital spending is likely to fall from 1991 budget levels, Herold contends, although major projects requiring long development times will continue to be funded.