World oil markets are riding on a razor thin margin of adequate oil supplies, warns the International Energy Agency.
Even without an outbreak of war in the Persian Gulf stemming from Iraq's occupation of Kuwait, a severely cold winter or accidental disruption of oil supplies could quickly soak up what little spare capacity there is in the oil supply system.
IEA warned member countries they must be prepared for a rapid, coordinated response to protect the world economy in the event of another loss of oil supplies.
FOURTH QUARTER OUTLOOK
IEA said oil supply/demand in October will remain manageable providing lost crude supplies do not exceed the 4.3 million b/d loss caused by the international embargo of Iraq and Kuwait.
Company stock draws, now about 50 days' supply, and increased production by other members of the Organization of Petroleum Exporting Countries should assure sufficient crude supplies through the rest of 1990, the agency said.
However, contributions from these two sources are finite, and a steady market tightening must be expected, IEA warns, with strains showing first in products vs. crude supplies.
In all but "the most extraordinary shortfall" government owned or controlled stocks and government restrictions on demand would be adequate, IEA said.
IEA RECOMMENDATIONS
IEA urged members to take steps to draw down stocks, restrain demand, and boost oil production in the event of an oil supply shortage.
It also recommended they encourage fuel switching and full price passthrough of crude and products price hikes, monitor stock building, investigate impediments to oil supply, seek ways to overcome supply difficulties, such as introducing temporary flexibility in environmental regulations, and continue and intensify energy conservation/efficiency measures.
IEA urged oil companies to continue drawing down stocks and show discretion in purchases to reduce market uncertainty and volatility.
In the event of a shortfall, the board will convene in an emergency session, and members will be expected to give delegates authority to activate a coordinated stockdraw and/or demand restraint measures.
In addition, IEA's standing group on emergency questions is to evaluate each members' capability to respond to an emergency.
PRODUCTS SQUEEZE
IEA noted that because heavier crudes are replacing lost supplies from Iraq and Kuwait, refiners will sometimes be constrained in meeting product specifications for some markets.
That will contribute to the likelihood of regional product supply imbalances as the Persian Gulf crisis continues.
World refining capacity bottlenecks had become increasingly apparent before the crisis, especially in the Asia/Pacific region. Worldwide surplus refining capacity outside centrally planned economies earlier this year was lower than at any time since 1971, IEA said. About 20 million b/d of upgrading and conversion capacity is essentially at 100% utilization, with minimal spare distillation capacity in a few countries, according to IEA.
Loss of 750,000 b/d of sophisticated refining capacity in Kuwait and 75,000 b/d of simple capacity in the Neutral Zone has sharply worsened tightness in eastern products markets, especially for naphtha, gas oil, kerosine, and jet fuel.
In addition, crudes replacing those lost from Iraq and Kuwait are on average 2-3 gravity lower and yield fewer light products.
"No physical shortage or unsatisfied demand for products is expected in any Organisation for Economic Cooperation and Development downstream market for the foreseeable future, barring a further loss of refining capacity or unusually cold weather," IEA said.
Light product markets, particularly propane, naphtha, and kerosine are expected to show persistent tightness, especially in the Far East.
Refinery capacity in OECD and non-OECD countries alike is being severely tested in order to meet light product demand, IEA said. The agency noted that spare distillation capacity is starting up in some countries, notably Japan, and maintenance scheduled previously for the third quarter and early fourth quarter is being postponed wherever possible.
Another concern is a surge in output of high sulfur fuel oil as a result of increased throughput of a heavier crude slate at a time when that product is losing market share in power generation.
"This potential surplus of HSFO may eventually inhibit a continuation of exceptionally high refinery crude throughputs because of worsening refining margins in key centers such as Singapore," IEA said.
MARKET OUTLOOK
IEA's near term outlook for supply/demand (table on p. 28) assumes OECD economic growth of 2.25% in August and September, compared with a precrisis projection of 2.9%.
Critical to the market balance have been private stock draws to offset the loss of Iraqi/Kuwaiti crude supplies, IEA said.
"OECD companies have made positive responses to the situation by using their commercial stocks and recent purchases to cover the shortfall, rather than building stocks in the third quarter as is normally their practice heading into the peak winter season."
A stockdraw of 1.7 million b/d needed to balance the market in the fourth quarter will leave oil company commercial stock levels at yearend equivalent to 64 days of forward consumption, which is neither abnormal nor unmanageable, the agency said.
Almost all of the 1.3 million b/d stockdraw during the third quarter took place outside of OECD nations, IEA noted. It added that the situation called for most of the 1.7 million b/d fourth quarter drawdown to come from OECD sources.
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