OPEC playing high-stakes poker as oil prices flirt with $30/bbl

OPEC has been playing what looks like a high-stakes poker game lately. So the prospect of both the organization and the markets upping the ante this week has pushed Nymex crude to almost $30/bbl.

Th Image85

OPEC has been playing what looks like a high-stakes poker game lately. So the prospect of both the organization and the markets upping the ante this week has pushed Nymex crude to almost $30/bbl.

The last time that oil prices were this high, a US-led military force was on the brink of launching a massive counter-offensive to drive Iraqi invaders from Kuwait in 1991.

OPEC's ministerial monitoring subcommittee dramatically raised the stakes this week when it issued a statement saying that it would recommend the group not only continue to adhere to pledged production cuts but that the cuts should be extended beyond their scheduled expiration dates at the end of March, when OPEC is next scheduled to meet. The prospect of an organization that has managed supply well enough to double oil prices in a year saying it would keep a lid on production despite growing alarms over possible supply shortages in the near term sent traders into a frenzy. Nymex crude for February closed at $29.95/bbl upon expiration Thursday, and the March contract closed at $28.20/bbl Friday, up almost a quarter on the day.

OPEC is sticking to its guns despite the hue and cry from many corners that demand has rebounded strongly and that stocks are dwindling rapidly, raising the specter of an oil supply crisis sometime in the first half.

According to the latest data from the International Energy Agency, global demand for oil continued to build up strength through the fourth quarter of 1999, while supplies declined significantly. IEA estimates that worldwide oil demand averaged 75.5 million b/d in 1999, a smart increase of 1.3 million b/d from the 1998 level and about 200,000 b/d more than expected.

Apparently, apprehension over the Y2K bug had a bigger effect on oil markets than the actual computer glitch itself (which has turned out to be the most overhyped threat since Comet Kohoutek-if one doesn't count global warming-but I digress). A spike in drawdown of oil stocks could be traced to some hoarding out of fear of Y2K-induced oil supply disruptions at the end of the year. IEA also cited continued strong demand in the US and a continuing economic recovery in Asia as contributor factors in the yearend rise in oil demand. As a result, global oil demand in the fourth quarter jumped 2.5% to 77.3 million b/d, putting more pressure on stock cover.

Perhaps of even greater concern to markets is the fact that supply failed to measure up as the year drew to a close. IEA estimated that global oil supply in December fell by more than 500,000 b/d from the same time the year before, with OPEC production declining by more than 600,000 b/d. So it follows that non-OPEC supply growth languished-although there were no significant outages anywhere resulting from technical problems. That has markets worried because it points to an underlying decline in wellhead deliverability that owes largely to the collapse in upstream spending during 1998 and early 1999 because of the oil price collapse. Of course, this is a temporary phenomenon, as a spate of oil fields in the North Sea and Gulf of Mexico and elsewhere in the non-OPEC world go on stream or ramp up production this year, putting non-OPEC supply growth back on track. And certainly budgets will be revised upwards if oil prices continue to linger in the stratosphere, lending further support to that trend. (Although it must be reiterated that, ultimately, non-OPEC supply decline is the prevailing long-term trend.)

It is interesting to note that, despite the year-on-year drop in OPEC production in December, the group's compliance with pledged production cuts actually slipped a bit, to 78% from 81% the prior month. Is this the much-anticipated widening crack in OPEC's solidarity so many were predicting would begin back at the start of fourth quarter 1999? Hardly. A change of 3 percentage points could be a mere statistical margin for error, and that latest figure is likely to be updated this month.

Still, the stockdraw continued at robust levels as 1999 wound down, reaching 2 million b/d in November in the OECD countries. IEA estimated stocks would, in fact, rise again in January by 2-3 million b/d to offset the Y2K bug-induced run on stocks. But the agency sees drawdowns rebounding to 2-3 million b/d in February.

For 2000, IEA forecasts that world oil demand will jump year-to-year by 2.4% vs. 1999 to 77.3 million b/d. That works out to increases of 1.4% (77.6 million b/d) in the first quarter; 3.2% (75.8 million b/d) in the second quarter; 2.6% (76.7 million b/d) in the third quarter; and 2.5% (79.2 million b/d) in the fourth quarter.

Consumer backlash

While all this ($25-30/bbl) oil spells good news for producers everywhere, the consumer backlash is starting to build.

Like clockwork, the cries for market intervention accompanied the spikes in product prices that came on the heels of a double whammy: the rise in crude oil prices and a surge in demand for those products.

In this case, the culprit was the arrival, at long last, of a real winter in the US Northeast and upper Midwest-the nation's primary consuming regions for heating oil and natural gas.

Heating oil prices have rocketed up a whopping 44% in the past 2 weeks, and heating oil jobbers and retailers in the affected areas have called for a drawdown of the US Strategic Petroleum Reserve to take some of the heat out of the market. So far, DOE Sec. Bill Richardson is resisting those calls, again citing legal stipulations that the SPR could be drawn down only in a genuine supply crisis, but some Northeast congressmen have said they will push for legislation giving President Clinton authority to sell SPR crude.

Adding to market fears was an ominous note that the IEA sounded in its last market report: that, if OPEC continues to hold to and roll over its production cuts, stocks could be down as much as 8% below normal seasonal levels by September. That's a situation that typically leads to spot shortages of crude oil. A March rollover also sets the stage for a spike in gasoline prices in the second quarter, as the summer driving season gets under way. That's good news for refiners, as analysts expect then-low gasoline stocks to keep a prop under prices and gasoline to outperform crude oil. But expect another consumer backlash when that happens.

Is OPEC bluffing? Will consuming nations up the ante by releasing strategic stocks? Something tells me this game is going to go down to the wire.

OGJ Hotline Market Pulse
Latest Prices as of January 21, 2000

Th Image85
Click here to enlarge image

null

Th Image86
Click here to enlarge image

null

Nymex Unleaded

Th Image87
Click here to enlarge image

null

Nymex heating oil

Th Image88
Click here to enlarge image

null

IPE gas oil

Th Image89
Click here to enlarge image

null

Nymex natural gas

Th Image90
Click here to enlarge image

null

More in New Plants