Oil price swings have speculators over a barrel
WORLD oil markets have played havoc with the nerves of speculators and refiners this year. The price of North Sea Brent blend - one of the benchmark crudes - was about $25/barrel at the start of 1997 after oil showed surprising zip in 1996.
Consumers had been relatively complacent last year - allowing inventories to run down in anticipation of the UN easing its embargo to allow Iraq to sell $1-billion worth of crude every 90 days for humanitarian reasons. The lower the price of crude the more barrels would come on sale, and at an average of $17 in the first three months of 1996 the market was looking at an extra 750 000 barrels a day.
On top of that, production outside the Organisation of Petroleum Countries was expected to rise by 800 000 barrels/day in the UK sector of the North Sea, for example.
But it took much longer to agree on the Iraq deal, which was eventually signed in early December, and there were glitches which halved the North Sea increase in output. In the meantime, commercial stocks, which had run at 73 days supply in 1990, had gradually slipped to 57 days worth.
With Asian demand rising, the industry went into a mild panic about its lower-than-usual level of stocks as winter approached. Hence, by the year-end Brent was showing a 47% increase over the 12 months.
The new year ushered in the Iraqi shipments of up to 550 000 barrels/day combined with the reality of quota-busting by members of Opec and expectations of a sharp rise in production outside the cartel. Crude tumbled, taking Brent blend down 30% to $17.30/barrel by mid-April with some analysts saying the fundamentals could take prices as low as $15.
A few rumours about problems with loading North Sea cargoes then brought a speculative rush, sparked by short-sellers covering their positions, which sent prices skittering up 16% towards $20. Added to the stories was the effect of the start of the maintenance season for North Sea production platforms plus rising petroleum demand as US drivers took to the post-winter roads.
It was short-lived. Over the past three weeks Brent has lurched back by 15% to $17/barrel and the market now faces an uncertain northern hemisphere summer with stocks rising.
The International Energy Agency in Paris which monitors the industrialised world has put inventory levels at 89 days demand, slightly higher than 12 months ago. And oil analysts at Merrill Lynch have forecast that stocks could be rebuilt to "excessive levels" by the final three months of this year.
At present Opec crude output is running some 2-million above the so-called quota ceiling of 25-million barrels/day - the chief offenders being Venezuela and Nigeria - to which must be added quantities of liquefied natural gas equivalent to 2.8-million barrels.
According to Deutsche Morgan Grenfell's latest commodity report, "this has resulted in a considerable amount of slack in the market ranging between 600 000 and 700 000 barrels".
The Opec oil ministers meet in Vienna in just under two weeks and are expected to go through the usual ritual of exhorting the delinquents to adhere to quota. Oil analysts doubt whether it will have much effect and do not see any chance of Saudi Arabia reverting to its old role of swing producer and accepting a cut in its allocation of 8-million barrels.
Part of the reluctance may stem from last year's unexpected price bonus which lifted Opec's total oil export revenues by 19% or $25-billion to $156.8-billion.
That was a lifeline for the most debt-strapped producers - an extra $2.8-billion for Venezuela and $2.6-billion to Nigeria. Few people can see countries such as these compounding the pain of weaker prices by also cutting their output.
The longer-term scenario sketched by Merrill Lynch is brighter for oil producers but hardly breathtaking.
Demand growth is forecast to rise sharply as the economies of the former Soviet Union emerge from the trauma of transition. In the past five years, their daily oil consumption fell by 3.9-million barrels while in the rest of the world it rose by 8.7-million. The net effect was to limit total growth to 4.8-million barrels. Over the five years to 2001 the cumulative increase could jump to 10.7-million barrels as consumption in the former Soviet Union turns around by 6.1% to a positive 2.2-million.
The supply-side will also be affected by the former Soviet Union. During the previous half decade, former Soviet Union output shrunk by 3.3-million to 7-million. This reduced the total non-Opec output rise from 4.6-million barrels to 1.3-million.
Merrill Lynch believes former Soviet Union production will slowly recover by 1.8-million barrels by 2001 as joint ventures with Western companies rehabilitate its neglected industry and open up new prospects in the huge Caspian Basin where estimate reserves of 178-billion barrels exceed those of Kuwait.
But growth among other non-Opec oil countries will slow to 2.1-million barrels and although the total net figure of 3.9-million is a big rise, it falls far short of the projected demand increase. It should start to mark the gradual return of Opec supremacy, lifting its market share from 40% to 42%. Even so, the Merrill Lynch price predictions for the end of the century are just $23.80/barrel for Brent crude.