The world oil market calms down

Press, 28 June 1983, Page 21

The world oil market calms down

Has the oil market finally stabilised, and stabilised not just for the next few months but the next few years? Oilmen always tend to be optimistic but this time there are a number of reasons for hoping that the worst of the downward pressure on prices is over and that the market might be entering a new period of balance between supply and demand, both short and medium-term. The short-term reason is the apparent success of O.P.E.C. in holding back exports, and hence buttressing prices, during the months of the intense destocking by oil companies and traders. O.P.E.C.’s success, as British Petroleum’s oil trading and supply manager, Bryan Sanderson, says, has been unexpected and far from easy. Against a formal agreement to hold total O.P.E.C. output at 17.5 million barrels a day, actual sales had fallen to less than 15 million barrels in March. Though rising, they are not much higher than •49.5 million barrels a day

now. Saudi Arabia is bearing the brunt of decline, with a production of around 5 million barrels per day, while Nigeria actually increased its ceiling last month with an output that at one time was reported to have reached 1.8 million barrels a day against an agreed ceiling of 1.3 million. At a meeting of O.P.E.C.’s watchdog committee in Paris earlier this month, the Nigerians agreed to come back into line and are now widely expected to remove the greatest source of continued friction within O.P.E.C. — the relative under-pricing of Nigerian oil — before the next major meeting of O.P.E.C. in Helsinki next month. Yet all is still far from certain. As BP’s Sanderson admits, the odds are still 50-50 on whether the price falls or rises over the next six months. Destocking continues, and there are a number of political reasons that could push Nigeria and other producers such as Mexico into relaxing their efforts to curb production.

From

ADRIAN HAMILTON

in London

If O.P.E.C. can get through the summer without a serious split, then the odds change dramatically in its favour over the winter. Final demand then rises seasonally by as much as four million barrels a day. Non-O.P.E.C. production is already near maximum, so it will be O.P.E.C. that has to fill the gap with a total production of perhaps 20 million against the current ceiling of 17.5 million. Will prices then go up, as Iran and Algeria hope, or will they remain stable, as Saudi Arabia has suggested? And will they fall again next spring as seasonal demand drops and surpluses develop? The pessimists, with most of recent experience on their side, suggest that this is precisely what will happen in a market where at least 60 per cent o| output is now

traded under short-term contract, compared to less than a quarter only two or three years ago. The optimists, on the other hand, now see signs of new, more stable price structures emerging. In particular they point to the recent agreement between Venezuela and Veba of West Germany under which Venezuela supplies half of Veba’s requirements at a price based on product prices realised within Germany. There have also been negotiations by Kuwaiti and Saudi interests to buy the refining and marketing interests of Gulf in Europe and Amoco in Italy. This again, it is argued, could mean that crude will be priced at a variable long-term rate reflecting the final product market, not just the crude oil spot market. In the longer term, the question

is whether the oil has finally turned back to growth. It is an argument that hinges partly on demand and the extent of conservation and fuel-switching built into the market. Of course, it also depends on supply. One new element has been the sluggish pace of new oil discoveries. Although discoveries have more than kept pace with demand, at some 25 billion barrels a year, BP argues that these figures disguise the extent to which they include old fields that have been re-evaluated. Removing all reserve additions from the calculations produces a figure of only 11 billion barrels of new oil a year, well below the level necessary to replace consumption even at today’s low demand figures. It is as well to remember, as Peter Holme, one of Shell’s managing directors, puts it: “The Middle East may be only supplying a third of the world’s oil but it still has two-thirds of the world’s reserves.” Copyright — London Observer Service.