On the front page of the WSJ today: Amazing how sentiment changes in just a couple of days what is really different then it was on Friday? And I thought my wife is hard to understand..VBG....
November 10, 1999
Falling Stocks of Crude Oil
Suggest Prices Will Stay High
By BHUSHAN BAHREE
Staff Reporter of THE WALL STREET JOURNAL
GENEVA -- World crude-oil stocks are falling rapidly as OPEC members
and some other petroleum exporters such as Norway and Mexico largely
stick to their supply-restraint agreement in the face of rising demand, data
from the Paris-based International Energy Agency show.
The latest monthly data imply that unless members of the Organization of
Petroleum Exporting Countries relent by pumping more oil, high prices are
here to stay, at least through the winter season in the northern hemisphere,
when heating and other needs raise energy demand. The market tightness
could be prolonged if OPEC continues its supply restraints beyond March,
when the current pact setting production quotas expires.
So far, OPEC ministers have been speaking with one voice in affirming that
they have no intention of raising their quotas before March, if then. On
Monday, the oil minister of Kuwait, an OPEC member, went one step
further by saying his counterparts in other member countries of the
organization were prepared to extend the output-restraint pact when they
meet next in Caracas on March 27 if oil stocks and prices weren't where
they wanted them to be.
Compliance Remains High
Meanwhile, OPEC countries are largely complying with their output
pledges. The IEA said OPEC compliance with its commitment, in a series
of successive agreements, to reduce output by some four million barrels a
day "has not dropped as much as some had believed." In October, the
IEA said, OPEC production showed compliance with the agreement at
87%, down from an upwardly revised 91% in September.
The IEA said oil-industry stocks in industrial countries plummeted by 1.8
million barrels a day as oil companies used barrels in storage to meet
global demand, which has been exceeding supply this year. The agency
said anecdotal data from other parts of the world also indicated a decline
in stocks.
In the third quarter alone, world oil demand totaled 74.8 million barrels a
day, 1.4 million barrels a day more than supply for all sources, including
OPEC. Demand is seen rising to 77 million barrels a day in the current
quarter, and to 78 million barrels a day in the first quarter of 2000.
Supply increases from sources other than OPEC won't come even close to
keeping up with the expected rise in demand. The IEA expects non-OPEC
output to rise by 800,000 barrels a day (to 45.2 million barrels a day) in
the current quarter, and by only another 200,000 barrels a day in the first
quarter of 2000.
"It's looking very tight," said Leo Drollas, deputy director at the
London-based Centre for Global Energy Studies. "Prices look like they'll
stay around an average $22 a barrel for [North Sea benchmark] Brent
crude, with spikes to $24," Mr. Drollas said of the months ahead. After
that, he said, it all depends on such key OPEC members as Saudi Arabia,
Venezuela and Iran. "If they don't increase output in April, when the
market needs an additional 1.8 million barrels of oil, prices will keep going
up," he added.
Future Implications
If OPEC does open the taps some, there will be a gentle weakening of
prices, with Brent prices averaging $18 a barrel in the fourth quarter of
2000, Mr. Drollas added.
OPEC's actions are likely to continue to weigh heavily on energy markets
for some time. That's because, as the IEA noted, high oil prices restrain
demand only slowly. And because last year's price crash has left major oil
companies wary of investing in projects that are profitable only at high
prices. That reduces the prospect of any early increase in non-OPEC
supplies. "Marginal properties are being shed," says J. Robinson West,
chairman of Washington-based Petroleum Finance Co., a consulting
group. "People [in companies] have decided that cash is king; they're risk
averse," Mr. West added, citing the pared-down investment programs of
most major oil companies. Such reduced spending is causing much pain to
companies in the oil-service sector.
Mr. West and other industry experts reckon that for a while, at least, oil
prices will move within a range of some $4 a barrel, much narrower than
the $12 a barrel difference between peaks and troughs this year. But oil
companies, whose projects take years to complete, continue to be fearful
of a repeat of last year's price collapse to $10 a barrel.
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