Robert J. Beck
Associate Managing Editor-Economics
Excess capacity brought on by rapidly rising oil production from outside the Organization of Petroleum Exporting Countries, coupled with stabilization of output from the Commonwealth of Independent States, will hamper OPEC's efforts to balance the oil market in 1996.
World demand for oil is projected to move up sharply. But non-OPEC output will increase even more, challenging OPEC to reduce production quotas.
The International Monetary Fund (IMF) projects a jump in world economic activity this year, with rapid expansion in developing countries along with steady growth among members of the Organisation for Economic Cooperation and Development (OECD). In addition, countries in economic transition in East Europe and the C.I.S. are expected to post economic growth in 1996 after several years of decline.
Demand growth associated with these economic improvements won't be enough to help OPEC, however. With non-OPEC production rising, and with C.I.S. output ending several years of decline, the call on OPEC crude oil will decline unless demand grows even more than is expected now.
Last year, a surge in world demand for petroleum products raised crude oil prices in a pattern stengthened by unusual Northern Hemisphere cold in the fourth quarter.
Prices moved up early in the year but sagged in the third quarter as refiners waited to see if demand strength would last. Then winter hit North America and Europe, and demand zoomed, raising prices again.
Crucial to worldwide demand this year will be a degree of economic stabilization of the C.I.S. Economic activity slumped during 1990-95 as the region struggled to adapt to market economics. But a measure of growth is projected for 1996.
A revival of economic activity would reverse the slide in C.I.S. oil consumption. And the region's oil production decline appears to have ended.
World economic growth
IMF estimates the 1995 world economic growth rate at 3.7%, compared with 3.6% in 1994.
Growth was particularly strong in the developing countries of Asia. These countries grew at a combined rate of 8.7% in 1995, compared with 8.4% the year before.
Growth rates also rose in the developing countries of Africa to an estimated 3% last year from 2.6% in 1994 and in the Middle East to 2.4% from 0.3%.
Economic growth slowed in developing countries of the Western Hemisphere to 1.8% in 1995 from 4.6% in 1994.
IMF classifies Russia and countries of central and eastern Europe as countries in transition and lacks data for estimating GDP for them. It instead publishes output estimates and projections.
For countries in transition, total economic output has been falling since 1990, with the decline rate averaging close to 10%/year through 1994 and slowing to 2.1% in 1995 as several countries of eastern Europe registered growth.
The decline rate for C.I.S. output slowed to 4.6% last year from 15.2% in 1994 and an average of 14.2%/year in 1991-93.
Economic activity in central and eastern Europe increased by an estimated 0.2% in 1995 after several years of significant decline.
Estimated economic growth in 1995 for the OECD group of industrial countries slipped to 2.4% from 2.9% in 1994. Growth in OECD North America fell to 2.6% in 1995 from 4.1% the year earlier. Economic growth in OECD Europe moved up to an estimated 2.9% in 1995 from 2.4% in 1994.
IMF projects world economic growth at 4.1% this year, with growth in developing countries rising to 6.3%. Growth will be most rapid in developing countries of the Western Hemisphere.
The rate of OECD economic expansion, meanwhile, will rise to 2.6%.
IMF expects growth in the C.I.S. and strong growth in eastern Europe. It projects expansion in countries in transition as a group to be 3.4% in 1996, with eastern Europe expanding 4.3% and the C.I.S. 2.4%.
Oil demand
Global economic expansion pushed demand for petroleum products to an estimated 69.9 million b/d last year from 68.6 million b/d in 1994.
And the International Energy Agency expects demand to rise again this year-to 71.5 million b/d.
OECD demand rose to 40.3 million b/d in 1995 from 40 million b/d the year before. It's projected at 40.9 million b/d in 1996.
In non-OECD developing countries, oil demand rose from 22.5 million b/d in 1994 to 23.5 million b/d in 1995 and is projected to reach 24.5 million b/d this year.
The largest increase in demand will again be in Asian developing countries, where consumption is expected to move up 500,000 b/d to 8.5 million b/d. Oil demand for this group of countries has increased from 6.5 million b/d in 1992.
Petroleum product demand is projected to increase in Latin America by 200,000 b/d to 6.2 million b/d, in China by the same increment to 3.5 million b/d, and in Africa by 100,000 b/d to 2.2 million b/d. Middle East demand will remain at 4.1 million b/d.
Oil demand in eastern Europe and the C.I.S. fell from 6.2 million b/d in 1994 to 6.1 million b/d last year. Consumption in the region is projected to remain at this level in 1996 as demand in East Europe increases and C.I.S. demand falls marginally.
C.I.S. oil demand slumped from 7.1 million b/d in 1992 to 4.8 million b/d in 1994 and an estimated 4.7 million b/d last year. It's projected at 4.6 million b/d this year.
Eastern Europe's demand is estimated to move up to 1.5 million in 1996 b/d from 1.4 million b/d last year.
Worldwide supply
OPEC production of crude oil and natural gas liquids remained fairly constant at slightly above quota during 1995.
According to IEA, OPEC crude oil production rose from 25.2 million b/d in the first quarter of 1995 to 25.5 million b/d in the third quarter. OGJ estimates that OPEC output averaged 25.6 million b/d in the fourth quarter, resulting in average output for the year of 25.4 million b/d. That is up from 25 million b/d in 1994.
In addition, OPEC output of NGL and condensate averaged 2.4 million b/d in 1994 and 1995 and rose to 2.5 million b/d in the fourth quarter last year.
OPEC was able to increase production last year because demand increased more than production from other sources.
Non-OPEC output
IEA estimates that non-OPEC liquids output rose to 40.8 million b/d last year from 39.8 million b/d in 1994 and 39.1 million b/d in 1993. The increase came despite declining production in the C.I.S. and the U.S., two of the largest producing countries in the world.
The decline rate in the C.I.S. had been pronounced in recent years but slowed in 1995. From an average of 12.2 million b/d in 1989, C.I.S. output fell to 7.9 million b/d in 1993 and 7.2 million b/d in 1994. Last year production averaged 7.1 million b/d.
U.S. liquids output fell from 9 million b/d in 1992 to an average 8.59 million b/d last year.
Non-OPEC production gains have occurred around the world. But most have come from the U.K. and Norwegian sectors of the North Sea.
Production from the U.K. averaged an estimated 2.84 million b/d in 1995, up from 2.71 million b/d in 1994 and 2.14 million b/d in 1993. U.K. output averaged 3.12 million b/d in the fourth quarter of 1995.
Production from Norway averaged 2.93 million b/d in 1995 vs. 2.69 million b/d in 1994 and 2.38 million b/d in 1993. Fourth quarter 1995 output averaged 3.25 million b/d.
Asian production moved up 200,000 b/d in 1995 to average 2.1 million b/d. Latin American output also was up 200,000 b/d at 6.1 million b/d.
Increases in 1995 of 100,000 b/d each are estimated for China, to 3 million b/d, non-OPEC Africa, to 2.2 million b/d, and non-OPEC Middle East, to 1.9 million b/d.
IEA projects that non-OPEC liquids production will move up by 1.9 million b/d this year to average 42.7 million b/d.
Total non-OPEC supply, including processing gain, will increase to 44.2 million b/d in 1996. There will be some seasonal fluctuation, with supply averaging 44.1 million b/d in the first quarter, falling to 43.7 million b/d in the second quarter, then moving up to 43.9 million b/d in the third quarter and 45 million b/d in the fourth quarter.
Falling C.I.S. output will no longer offset non-OPEC increases. C.I.S. output is projected to remain at 7.1 million b/d in 1996. A year ago IEA was projecting that C.I.S. output would keep slumping to 6.7 million b/d in 1995.
Effects on OPEC
OPEC's main problem in 1996 is that the expected sharp increase in worldwide demand will be met entirely from non-OPEC supply.
In fact, it now appears that the call on OPEC oil will decline in 1996 despite the huge gains in worldwide consumption.
OGJ estimates that the call on OPEC crude oil and NGL will slip in 1996 to an average 27.5 million b/d from 27.8 million b/d last year.
OPEC production of NGL will average 2.7 million b/d, up from 2.4 million b/d in 1995. Therefore, the demand for OPEC crude, to which the group's quotas apply, will fall by 600,000 b/d to average 24.8 million b/d.
This is based on the assumption that there will be an increase in world stocks averaging 200,000 b/d, similar in magnitude to 1995. Stocks will be increased to support the increase in worldwide product demand.
The eventual call on OPEC oil will depend on several major factors. The actual increases in world oil demand and non-OPEC output will be critical. In addition, stabilization of C.I.S. output will be a major factor. A further decline in C.I.S. output would make more room for OPEC crude in the margin between total consumption and non-OPEC supply.
And the actual level of stock buildup or drawdown will play a role. If refiners decide to build larger contingency or seasonal stocks, demand for OPEC oil would rise.
Problems loom
If the market holds true to these expectations, however, problems loom for the exporters' group.
Continuation of OPEC output at current levels would suppress crude prices. The challenge for OPEC will be to reduce quotas in accordance with declining expectations for the call on OPEC crude, then to enforce them.
The group received help from nature in late 1995, first when hurricanes reduced Gulf of Mexico production and later when cold weather in North America and Europe lifted demand.
According to IEA, fourth quarter 1995 world demand surged to an estimated 71.4 million b/d. IEA estimates total OPEC crude production in October and November at 25.64 million b/d, and world supply at 71 million b/d. Supply at that level implies a stock reduction of about 400,000 b/d.
However, there was a stock build during the second and third quarters of 1995 amounting to an estimated 1.2 million b/d.
OPEC thus has a higher level of output from which it will have to make reductions when demand returns to more normal levels later this year. But the revenue surge OPEC members enjoyed from the period of elevated volumes and prices may ease the challenges of quota discipline.
OPEC's difficulties would be compounded, of course, if Iraq satisfied conditions for relaxation of the United Nations embargo on its oil exports.
Prices
Since the Persian Gulf War of early 1991, crude oil prices have mostly fluctuated between $15/bbl and $20/bbl, generally weakening in 1993 and 1994.
The average price of world export crude oil started 1995 averaging $16.51/bbl in January. Strong world demand pushed the price up to an average $18.30/bbl in April. Prices then fell to an average of $15.66/bbl in July.
Priced moved up slightly in August and September then fell to $15.55/bbl in October. However a surge in demand resulted in the average price of world export crude moving up to $16.22/bbl in November and an estimated $17.35/bbl in December.
Strong demand is helping to sustain prices at a level higher than a year earlier. And prices could move even higher if cold weather continues in the major consuming areas.
Crude prices the rest of the year will depend on the interplay of economic activity, petroleum demand, non-OPEC supply, and OPEC's response to its challenge.
Political and economic developments in the C.I.S. will remain significant. They will determine not only whether the region can sustain oil output but also whether consumption grows, which would reduce exports.
International drilling
International exploration and drilling activity in 1996 will depend on the trend in crude oil prices. If prices firm at current levels or move up, then an increase in drilling activity is anticipated in 1996.
New opportunities for lucrative exploration and production agreements have developed. Many countries with excellent production potential need investment capital and technical assistance.
Increased availability of exploration and production prospects, coupled with technical advances that have greatly improved exploration and drilling efficiencies, have sustained international activity through a period of static oil prices.
Total exploration and production expenditures haven't fallen by as much as the rig count, reflecting growing reliance by industry on nondrilling methods.
The Baker Hughes international count of active rotary rigs outside of the U.S. and Canada averaged an estimated 757 in 1995. This was up from 734 active rigs internationally in 1994. The annual average international rig count was 773 active rigs in 1993, 857 in 1992, 909 in 1991, 907 in 1990, and 922 in 1989.
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