How Stripper Well Affect the U.S. Economy
World oil prices are headed for a fall as industry stocks rebound following a harsh winter and production outside the Organization of Petroleum Exporting Countries catches up with expectations.
So predicts the Centre for Global Energy Studies (CGES). The London firm attributes recent high oil prices to a combination of Hurricane Roxanne in Mexico and delayed production start-ups in the North Sea and Australia.
CGES reckons oil demand in fourth quarter 1995 among Organisation for Economic Cooperation & Development (OECD) countries would have been 300,000 b/d lower without the cold weather, an increase of only 1.2% from 1994's mild fourth quarter.
The hurricane and delayed start-ups cut non-OPEC supplies by an average 800,000 b/d during fourth quarter 1995, CGES said. Thus, industry stocks were low when the weather turned cold, causing prices to rise sharply (OGJ, Dec. 4, 1995, Newsletter).
Stock situation
Industry stocks in the U.S., Europe, and Japan fell by 1.8 million b/d in December as cold weather hit all regions. Forward cover provided by OECD stocks was only 60 days at the start of 1996, a drop of 3 days from the same time last year.
CGES said, "Over the past year, crude oil buyers have become increasingly reluctant to hold excessive stocks. In the U.S., refiners have progressively reduced the stocks they hold, ending the year with the lowest level of inventories since 1972."
CGES reckons buyers who paid a $1/bbl premium for prompt delivery crude oil in January viewed the alternative of holding higher stocks as more costly in the long run.
Refiners are expected to build gasoline stocks to provide a cushion against expected higher demand during the spring and summer driving season, but CGES said they have little financial incentive at present to hold on to output.
The firm said, "Although refiners may have little incentive to rebuild product stocks now that futures markets are in steep backwardation, they do have an inducement to increase runs.
"With strong prompt prices for all main products, margins have improved and refiners are buying heavily to support higher runs. In the short run, demand for crude from refiners is expected to support oil prices close to their current levels."
Once non-OPEC production recovers, however, the pressure on oil prices will be downward.
CGES said, "In contrast to last year, non-OPEC output is expected to rise 1 million b/d from fourth quarter 1995 to first quarter 1996, setting the scene for weaker prices from second quarter 1996 onward.
"Since only limited maintenance is scheduled in the North Sea this year and most new fields do not need to be tied into the pipeline network, OPEC can expect little relief once industry stock cover is rebuilt, which could be accomplished by the start of second quarter 1996."
If OPEC production continues at about 25.4 million b/d, world production will outstrip demand. Buyers would need to build stocks at a 2 million b/d clip during the second and third quarters, which goes against their preference to cut inventory costs.
1996 prices
"OPEC members need to act almost immediately to maintain last year's average price of $16.90/bbl in 1996," CGES said.
"If they could restrict their combined output to 25 million b/d from second quarter onward, the average price of the OPEC basket in 1996 would be similar to last year's."
CGES predicts the most likely period averages for OPEC basket crudes will be $17.10/bbl in the first quarter, $17.60 in the second, $16.40 in the third, and $14 in the fourth quarter.
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