Oil stocks, will they rise or fall this winter?
Reuters, 10.28.03, 6:54 AM ET
By Andrew Mitchell
LONDON, Oct 28 (Reuters) - Oil industry experts agree, inventory levels will drive the direction of oil prices this winter. The trouble is they are split down the middle over whether importers can expect feast or famine -- a rare end-year stock-build or the normal draw.
One camp expects recovering Iraqi production and improved supply from Venezuela and Nigeria to swell storage tanks and erode oil price strength. An opposing faction sees strong Asian demand, particularly from China, and OPEC's determination to prevent a stock-build as likely to prop prices up.
"The reason there's such a division is that it's a close call," said Sarah Emerson of Energy Security Analysis (ESAI) in Boston.
OPEC's decision to cut production by 3.5 percent from November was founded on fears that rising Iraqi post-war production would swell global oil stocks by 600,000 barrels per day (bpd) in the fourth quarter -- a period when stocks normally decline.
With Russia poised to lead a surge in non-OPEC production growth next year, OPEC feared that prices could quickly tumble if it allowed stocks to start swelling.
Some analysts say stocks are building fast enough before OPEC's cuts take effect next month to force the cartel to cut supply again at its December 4 meeting.
"OPEC production cuts are going to take a while to hit the market and Iraqi production has been creeping up," said Mike Barry of Energy Market Consultants (EMC <EMC.BK>) in London.
Crude stocks in the giant U.S. market have risen more than four percent since the start of September to stand above last year's level and within sight of the 300-million-barrels mark.
"The stock-build could continue into November -- several weeks of builds would get the market pretty worried," said EMC 's Barry, who sees global stocks rising by 400,000 bpd in the fourth quarter.
By contrast, Paul Horsnell, head of Energy Research at Barclays Capital in London expects OPEC's early supply curbs to put a lid on the strong imports that have been boosting U.S. stocks of late.
"We don't see a huge surge in imports, and that will constrain the supply chain for the rest of the year. There are more things here to tighten it than slacken it," said Horsnell, who expects stocks to fall by 300,000 bpd in the fourth quarter.
ASIA SUCKS IN CRUDE
Leading world exporter Saudi Arabia cut back supply in September, taking action even before OPEC's formal deal.
And while the gradual return of Japan's nuclear plants from maintenance has eased oil consumption there, record demand growth in China has drawn in crude supplies from all round the globe to Asia.
"Outside Japan there is a large sucking noise from the rest of Asia that's really making a difference. The question is how long it will last," said Horsnell. Record volumes have been sailing to Asia from swing exporting region West Africa, cutting availability for the United States.
For four years OPEC's determination to stop supplies swelling has held oil prices in its $22-28 a barrel target range. The cartel's reference price has been above the top end of its $22-28 range for nearly three weeks.
OPEC's task in keeping a lid on stocks this year was made dramatically easier as war and political unrest slashed supply from Iraq, Venezuela and Nigeria.
"Stocks at the turn of 2002/3 got very low because of the Venezuela strike. That means we're going to start seeing year-on-year surpluses which will weigh on market sentiment," EMC 's Barry said.
This year OPEC's ability to stick to quota limits will face a sterner test. "It will be difficult come the first half of next year for OPEC to keep a lid on inventories," said George Beranek of Petroleum Finance Company in Washington D.C.
"OPEC will be able to mitigate to some extent, but this year Venezuela and Iraq really did the job for them," said Beranek, who sees a 600,000 bpd stockbuild in the fourth quarter.
All calculations go out of the window if the northern winter -- which determines heating demand in the world's major economies -- turns out to be exceptionally cold or especially mild.
Analysts are just as split as to how comfortably off industrialised nations are for heating oil supplies. Lower supplies from the former Soviet Union has hindered gas oil stock-building in Europe, but U.S. heating oil inventories have risen to year-ago levels, while Japanese kerosene stocks are brimming over.
"My read is that we're looking towards rising stocks but we don't see much of a price decline until January as no-one wants to bet against the weather," said ESAI's Emerson.
Reuters News Service |
