IEA SEES EARLY 4TH QUARTER OIL MARKET BALANCE

The International Energy Agency predicts world oil supply and demand will balance in September-October even with the loss of Iraqi/Kuwaiti oil supplies stemming from an international embargo.

At its governing board meeting Aug. 31, IEA said production increases by members of the Organization of Petroleum Exporting Countries and other oil producing countries in tandem with a large commercial stockdraw should compensate for a supply shortfall from Kuwait and Iraq it puts at 4.3 million b/d.

IEA put the commercial stockdraw by Organization for Economic Cooperation and Development members in August at 300,000 b/d.

Further, IEA expects the runup in crude oil prices will depress demand for petroleum products in the fourth quarter.

Should supplies tighten later in the quarter, however, IEA plans to begin implementing government stock draws and other actions needed to balance the market.

Meantime, Saudi Arabia already has jumped its crude production by more than 2 million b/d, with mixed prospects for production hikes among other OPEC members.

Elsewhere, product price hikes continue to outpace those for crude oil as market concern grows over loss of Kuwaiti refining capacity.

IEA STANCE

IEA Governing Board Chairman Ulrich Engelmann said the onset of winter in the northern hemisphere could bring tighter markets as demand increases and refineries approach operating capacity.

"At the same time, companies' ability to continue drawing significant amounts of stocks will diminish," he said.

"Should the situation require it, IEA will immediately take whatever emergency action is needed, including coordinated use of public and government controlled stocks and further demand restraint."

Engelmann noted that IEA members Japan, West Germany, and the U.S. had stopped buying oil for their strategic reserves, further reducing the call on oil supplies.

So far, IEA has been reluctant to draw on government stocks, deeming it unnecessary.

"Such a stockdraw would not have had any bearing on oil prices, which are affected by political uncertainty," said Engelmann.

IEA turned down proposals by Iran at last month's OPEC ministerial meeting to link OPEC production increases to a drawdown of IEA stocks. Iran also wanted a joint meeting between the two bodies.

The IEA secretariat said the suggestion was "not feasible, politically or economically."

The energy group representing the main oil consuming countries in the world has always been unwilling to enter into any relationship with OPEC as a group although it is at pains to explain that it has relations with individual OPEC members.

"Interfering in the oil market must fail because there can be no improvement by national governments trying to balance supply and demand. OPEC did not succeed." Engelmann said.

That stance would not rule out financial and other aid to countries in need, he added.

IEA FORECAST

IEA estimates higher prices will cut OECD oil consumption in the fourth quarter by as much as 500,000 b/d to 38.9 million b/d.

That figure is 700,000 b/d less that IEA's fourth quarter projection at the end of July.

That big a decline would help relieve pressure on markets caused by the shortfall from the Persian Gulf.

IEA contends the demand decline will result from higher oil prices, lower economic growth, and some movement forward of deliveries into the third quarter.

Further, preliminary estimates for the third quarter suggest OECD oil consumption increased by 3.5%, or 1.2 million b/d, to 37.8 million b/d because of buildup in secondary and tertiary stocks in July and early August.

No hoarding has been observed in recent weeks, IEA said.

REGIONAL BREAKOUT

The biggest fourth quarter oil demand decline is expected in North America, where consumption could fall by 2.5%, or 500,000 b/d, to 19.3 million b/d, according to IEA projections.

In Europe, consumption could drop by 1%, or 100,000 b/d, to 13.2 million b/d.

However, consumption in the OECD Pacific nations will rise 2.5%, about 200,00 b/d, to 6.4 million b/d.

Outside OECD, demand in developing countries will jump by 3.5%, or 500,000 b/d, at 15.6 million b/d.

IEA predicts oil demand will remain sluggish into 1991 with a slight decline expected in the first half on the assumption that oil prices stay at current levels and exchange rates remain stable.

IEA said the U.S.S.R. may divert more crude exports into the eastern European countries that have been hardest hit by loss of Iraqi/Kuwaiti oil supplies.

IEA believes eastern Europe's imports of OPEC crude dropped in August with the loss of Iraqi supplies that have not been offset by imports of Libyan and Algerian crude into Hungary via Yugoslavia.

The agency noted it is not yet clear how crude and product flows into and out of the former centrally planned economies are adjusting to the loss of Kuwaiti and Iraqi supplies.

Eastern European countries, principally Yugoslavia and Bulgaria, had been importing 150,000-200,000 b/d of Iraqi oil from Ceyhan.

At the same time, the Soviet Union was lifting about 90,000 b/d of Iraqi oil for delivery to India.

OECD onshore stocks last month stood at 3.438 billion bbl, 153.3 million bbl more than a year ago.

That is equivalent to 98 days' demand, 2 days more than a year earlier.

OPEC PRODUCTION PROSPECTS

Saudi crude output has jumped to an average 7.65 million b/d.

That breaks out as 7.5 million b/d by Saudi Arabia and 150,000 b/d from the Neutral Zone offshore fields, where output has been unaffected by Iraq's invasion of Kuwait.

The offshore fields in the Neutral Zone operated by Saudi Aramco have been producing about 300,000 b/d, divided equally between Saudi Arabia and Kuwait.

No information is available on the destination of Kuwait's share of Neutral Zone output, although industry sources assume it is being sold on behalf of the government in exile.

According to Lloyds List, Saudi state refiner/marketer Samarec has chartered two large crude carriers as storage for heavy crude that has proven difficult to sell even in the current market.

The Saudis offer no indication of likely production levels for the fourth quarter.

However, Aramco is thought to be preparing for a further increase as winter demand in the northern hemisphere begins its normal seasonal rise.

The Saudis could produce another 800,000-900,000 b/d on a short term basis to cope with higher demand in the fourth quarter and early 1991.

It is unlikely this level could be sustained through the first quarter 1991, however.

The United Arab Emirates has already boosted output to the 2 million b/d expected by the market from 1.55 million b/d, with the increase coming from Abu Dhabi. Dubai production is unchanged at about 450,000 b/d.

Iran has made no real attempt to exceed its 3.14 million b/d quota. The pattern of sales has changed, but output for September is expected to average about 3.2 million b/d.

Qatar has pushed output to 400,000 b/d, just 29,000 b/d above its quota, and there is little chance of any further significant increase.

Among OPEC members outside the Persian Gulf, it is clear that only Venezuela, Libya, and Nigeria are able to make significant increases in production.

Venezuelan output should approach 2.45 million b/d by yearend vs. its quota of almost 1.95 million b/d.

Libya, with a quota of 1.233 million b/d, has boosted production to 1.4 million b/d and said it could add another 100,000 b/d before yearend, although industry sources think it might have trouble in sustaining this higher level.

Nigerian output has jumped to 1.85 million b/d from the quota level of 1.611 million b/d and could go as high as 1.9 million b/d in the fourth quarter.

OPEC's other West African producer, Gabon, has a quota of 197,000 b/d and is pushing its new onshore fields to produce about 270,000 b/d.

Ecuador, Indonesia, and Algeria are struggling to meet new OPEC quota levels.

PRODUCT PRICE HIKES

Prices in products markets are advancing ahead of crude prices in Europe and the Far East, reflecting concern about industry's ability to replace the 700,000 b/d of sophisticated processing capacity lost when Kuwait was invaded.

Premium gasoline on European markets last week soared to $377/ton from $240/ton in one week's trading, returning to the highest levels seen in August. Gas oil prices jumped to $264/ton from $227/ton in the same period.

London market sources say demand for products remains extremely strong but as yet there are no physical shortages.

At this stage it is not possible to say how much of this strong demand is accounted for by customer stockpiling ahead of the winter.

Far Eastern markets have been hardest hit by the loss of the Kuwaiti capacity and the declaration of force majeure by Saudi Arabia on 55,000 b/d of middle distillates diverted to the military buildup in the region.

Saudi Arabia has made a major effort to ensure Far Eastern countries that were major crude oil customers of Kuwait and Iraq do not run short, but it has not been able to help with product deliveries.

Further, IEA said that refiners face the prospect of producing more hard-to-sell heavy fuel oil as a result of the heavier crudes coming onto the market to replace supplies from Iraq and Kuwait. This will squeeze flexibility of the refining system, it said.

Crudes most likely to replace Kuwaiti and Iraqi oils, which averaged 32.5 gravity and 2% sulfur, are likely to be less than 30 gravity but slightly lower in sulfur content. Since some important upgrading capacity has been lost in Kuwait, other refiners could be constrained in meeting products demand or obliged to produce more heavy products.

Yemen provides an example of the interaction between the availability of crude and products.

The 170,000 b/d Aden refinery was taking about 50,000 b/d of crude from Kuwait and Iraq before the invasion, 10,000 b/d from Yemen's Shabwa fields, and about 30,000-40,000 b/d from other sources.

The embargo on Iraqi and Kuwait supplies coincided with loss of deliveries from the Shabwa area, where Soviet contractors developing added production capacity and a new pipeline to the coast are in a dispute with the Yemeni government.

To make good the shortfall that was starting to affect supplies to the local market, the authorities have declared force majeure on the state's share of deliveries from Yemen Hunt Oil Co.'s Marib field and diverted the oil into Aden.

Elsewhere, Total CFP delivered 20,000 tons of diesel oil and kerosine to Mauritius in the Indian Ocean to make good a shortfall in deliveries from the Kuwait Petroleum Co. The cargoes should cover the island's needs until October, and the supply contract will be renewed if necessary.

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