Gary, Here is a comprehensive report on the world oil markets....
World Oil Market Forecast
SUMMARY
OPEC has set the stage for a dramatic improvement in oil market supply/demand fundamentals over the next several months. Stock draws for the remainder of the year are expected with the largest draws coming in the third and fourth quarters, even assuming some let-up in OPEC compliance as prices strengthen. The expected over 1 MMB/D draw in 1999 sets the stage for potentially large OPEC volume expansion in 2000 and higher prices, a combination OPEC should relish. There are still many skeptics out in the market who believe OPEC compliance will immediately be poor. PIRA believes these companies are not grasping the substantial nature of this agreement, its fairness, its political backing and its important revenue consequences to cash starved countries. Yes, compliance in April may be barely above 50%, but this is expected. Over 90% compliance in May and June is quite likely. These skeptics will fuel the price rally over the next two months.
OPEc means business
The recently agreed 1.7 MMB/D of OPEC output cuts is an aggressive move by OPEC to shock oil markets and quickly push up prices. Saudi Arabia orchestrated the agreement, putting to rest, at least for now, a market share oriented oil policy and replacing it with one emphasizing price and revenue. The financial pain of low prices was clearly the major reason for the policy change, but other considerations also played an important role.
OPEC's very survival was at stake. Why belong to an organization which does nothing to support prices, when its very existence is premised on this objective. Why would non-OPEC Mexico and Norway want to continue to cooperate with OPEC when they have had nothing to show for it?
Outside of Venezuela and Iran, OPEC compliance was over 90% in 1998. Once a new pro-OPEC government was installed in Venezuela and compliance to previous agreed cuts was implemented, Venezuela ceased to be an impediment to further cuts. Fairness dictated a smaller additional cut for Venezuela given its much larger agreed cuts earlier. Fairness is part of the glue which will likely hold this agreement together far longer than those in the past.
The high level political agreement between Saudi Arabia and Iran paved the way for Iran to cut from its desired higher volume base (3.9 MMB/D). The two countries have been working to improve relations and this was a perfect opportunity to cooperate and to demonstrate good will. Also, Iran's case for cutting from the higher base was not unreasonable, especially in relation to how other countries benefited disproportionately from Iraq's exit from oil markets during the 1990 to 1996 period. Political backing and fairness will likely ensure better Iranian compliance this time around.
Higher oil prices will also ease the burden on the Iraqi people since at maximum oil exports low oil prices have made it impossible for Iraq to obtain the $5.26 billion worth of humanitarian oil sales under the United Nations' Oil For Food Program. Pressure was building to allow oil field development in Iraq to increase oil exports and humanitarian supplies. While this pressure will not go away, the immediacy of the issue has been postponed.
PIRA expects OPEC compliance to initially be very good, over 90% beginning in May. The April compliance on the incremental cut is expected to be only about 50% given the difficulty of cutting back shipments once customers nominations have been accepted. Compliance is expected to slip as prices rise. PIRA sees such tight balances that oil markets will be able to absorb 1 MMB/D of additional OPEC crude output between June and the fourth quarter and remain supportive to price.
OIL MARKET FUNDAMENTALS WERE ALREADY IMPROVING
Commercial stocks in the three major OECD markets have already declined some 90 million barrels between the start of the fourth quarter of 1998 and the end of February 1999. In the year earlier period, commercial stocks actually increased 30 million barrels. Thus, the year-on-year commercial stock excess narrowed from 150 million barrels at the beginning of the fourth quarter to only 35 million barrels by the end of February. Commercial stocks were set to move below last year's level in April even before the recently announced output cuts.
Asian oil stocks are especially low, having declined by some 250 MB/D or over 90 million barrels in 1998. Asia is expected to build its commercial inventory in 1999 as economic recovery continues. Thus with world inventories substantially declining in 1999, commercial inventories will decline even more in the Atlantic Basin, just the opposite than the case in 1998.
Commercial crude stocks in the three major OECD markets by February 1999 were already below the year earlier levels, falling some 23 million barrels or almost 3% below end February 1998 levels. All of this year-on-year decline was in Japan, but in the United States and Europe crude stocks were only 7 million barrels or 1% higher than last year. Since crude stocks in the three major OECD markets peaked in May 1998 they are estimated to have declined some 70 million barrels by the end of February 1999.
Crude MARKETS WILL QUICKLY TIGHTEN
The largest reported crude stock builds in 1998 were in April and May, when the three major OECD markets built crude stocks by 60 million barrels. Year-on-year crude arrivals to consuming markets this April and May are forecast to decline 1.5 and 2.7 MMB/D respectively because of the impact of OPEC and non-OPEC output cuts. Crude stocks will not likely build this April and will substantially decline in May. Large additional crude stock declines are expected in June, July and August when year-on-year crude arrivals fall 3.7, 2.6 and 2.7 MMB/D respectively. Keep in mind that in 1998 during these three months crude stocks declined 48 million barrels or 520 MB/D!
Between the first and second quarters of 1999, world crude supply will decline by over 2 MMB/D while crude runs are forecast to decline by perhaps 800 MB/D. From the second to the third quarter of 1999, crude supplies are expected to increase 300 MB/D as OPEC compliance slackens, but crude runs are forecast to increase by over 1.5 MMB/D. Anyway you slice it, PIRA expects crude supply/demand balances to substantially tighten in the months ahead. In this environment, the likelihood of a WTI price disconnect this summer has increased.
Crude balances will be tightening while the lead product, gasoline is cleaning up surplus inventory on both sides of the Atlantic. An extremely tight U.S. West Coast gasoline market together with the unscheduled shutdown of the largest East Coast cat cracker is setting the stage for tighter gasoline markets. Gasoline stocks in the United States and Europe ended February at only 4-5% higher than the prior four-year average. This is not much when considering U.S. gasoline demand will be some 8% higher in 1999 than it was in 1995.
MONTHS OF STOCK DRAWS AHEAD
PIRA's world oil supply/demand balances show a second quarter counterseasonal stock draw of 700 MB/D to be followed by stock draws of 1.6 and 3.2 MMB/D in the third and fourth quarters, respectively. Worldwide days' supply forward cover falls to only 57 days by year-end, one day below end-1996 levels. This suggests extremely tight oil markets by year-end, especially considering that many companies may not want to reduce inventories towards the end of the year because of the uncertainties associated with the Y2K issue.
PIRA believes OPEC cut output too aggressively and either through increased non-compliance or OPEC officially increasing output levels at its September meeting, volumes must increase or prices will go higher than OPEC and industrial country monetary authorities would like to see. This is why PIRA believes prices will somewhat moderate after September, since it is likely OPEC will need to increase production.
CHANGES TO PIRA'S WORLD SUPPLY/DEMAND BALANCES
The recently agreed OPEC output cuts, which were bigger than anticipated, represent the largest change to PIRA's oil balances from last month's assessment. OPEC crude supply in 1999, estimated at 26.7 MMB/D, is down 0.5 MMB/D for the year from the end February forecast. Within 1999, OPEC output in the first quarter was up substantially. Iran pushed February output up to 3.95 MMB/D in an effort to maximize output before agreeing to new cuts, and Iraq set a new record for exports at 2.1 MMB/D as it continued to push its production capability. But, reflecting OPEC's pledged output cut of 1.7 MMB/D starting April 1st, OPEC output for the balance of the year is expected to be down about 0.7 MMB/D more than forecast last month. Previously, PIRA had figured that the market could be turned around with an OPEC pledged reduction of only 0.7 MMB/D. The much larger OPEC cut has led to the much stronger market view.
Non-OPEC supply was reduced 0.2 MMB/D from last month. Much of this change was related to the above OPEC agreement as more support from non-OPEC countries was obtained than was anticipated. In particular, Norway's contribution of another 100 MB/D cut was not expected and Mexico's 125 MB/D cut was larger than last month's assumed 100 MB/D extra cut. PIRA is discounting the pledged reductions from Russia and Oman as real changes. Lack of investment in Russia's oil industry appears likely to result in a decline larger than their pledged cut, and continued implementation of last year's Omani output reduction would seem to be the maximum reduction there.
Other non-OPEC reductions from last month were mainly in the U.S. and the U.K. With extremely low oil prices over the past few months, budgets were cut, and most of these cuts are not likely to be reversed this year. Decline rates for existing fields will be sharper reflecting less infill drilling, less well workovers, and fewer development wells. The U.S. was revised down about 80 MB/D, mainly in Alaska and NGL's (the latter followed from a lower natural gas production forecast). The U.K. was down only 20 MB/D as a significantly lower level of maintenance shutdowns offset most of the sharper decline rate impact. Overall, non-OPEC production in 1999 (including Mexico and Norway) is forecast to fall about 350 MB/D this year versus 1998.
CHANGES TO BALANCES, MMB/D
1998 1999
World Oil Demand* .07 -.12
Non-OPEC Supply** .05 -.23
OPEC Crude Output .00 -.46
Discretionary Stocks -.02 -.57
* Includes non-discretionary stock demand
** Includes OPEC NGL/Condensate
World oil demand, including non-discretionary inventory, was reassessed down 0.1 MMB/D for 1999. Former Soviet Union and China demand was reduced by a total of almost 0.1 MMB/D reflecting recent trade data which is used as a guide in determining current demand. FSU exports have remained very strong while China imports were less than expected. Naphtha demand was reduced in Europe and Canada. Non-discretionary inventory was reduced relative to last month as the OPEC output cuts will lower oil afloat, particularly in the second quarter. On the plus side, U.S. demand was raised about 0.1 MMB/D reflecting a higher economic growth assessment. This growth could become somewhat lower if oil prices surge. Overall, demand growth in 1999 is now estimated at 1.1 MMB/D.
Reflecting the above changes, discretionary stocks in 1999 are expected to fall by 1.5 MMB/D. This decline is 0.6 MMB/D faster than seen last month.
PIRA'S OIL MARKET SCOREBOARD
March 29, 1999
Bullish Bearish Neutral
MARKET ISSUES
From Today, April Rate of Change In:
Onshore Commercial Stocks (
Days Supply Cover (
PAD II Crude Stocks (
Refinery Margins (
Atlantic Basin Sweet to Asia (
OPEC Compliance (
Economic Outlook (
Interest Rates (
Refinery Maintenance (
Other Factors:
Unreported Stocks (
Technicals (
Seasonals (
Market Psychology (
Non-Commercial Position* (
Iraq/U.N. (
OIL PRICE OUTLOOK
Next 30 Days (
Next 90 Days (
Next Year (
* Reverse indicator: length is bearish, short is bullish |
