Big deal, buy a pogo stick.

March 10, 2000

FOCUS-World needs big oil output boost-IEA watchdog

LONDON, March 10 (Reuters) - The world needs a big rise in oil output to prevent more price volatility and problems with gasoline supply, the West's energy watchdog said on Friday.

"This needs to happen quite soon, as the margin for error is fast disappearing," the International Energy Agency (IEA) said in its Monthly Oil Market Report.

But dealers expect the OPEC cartel to agree to pump far less new crude than the extra 2.3 million barrels per day (bpd) the report suggested would restore oil inventories to normal levels.

That volume would require an 11 percent output rise from the 10 OPEC nations curbing supply. Dealers say an OPEC meeting on March 27 is unlikely to agree more than a 1.7 million bpd increase.

"Significantly more crude will be required to allow gasoline and other product stocks to be rebuilt and to replenish crude stocks," said the Paris-based IEA.

OPEC UNDER PRESSURE

"To get crude and product stocks back to the seven year average (1990-1996) would need a rise in crude production of about 2.3 million bpd, even assuming that non-OECD stocks are unchanged," the IEA said

The agency, an arm of the Organisation for Economic Cooperation and Development (OECD), was set up in 1974 to protect the interests of oil consuming nations.

The Organisation of the Petroleum Exporting Countries is under intense pressure from the United States -- the world's biggest oil market -- to bury output policy differences and unleash extra supplies from April to tame runaway prices.

OPEC's Saudi Arabia and Venezuela and non-OPEC Mexico -- architects of the output cuts -- agree on the wisdom of raising output. OPEC sources say price hawk Iran also recognises the need to open the taps when the curbs expire at the end of March.

But dealers who have tripled prices since early 1999 amid tight supply are keen to find out how much more OPEC will pump.

Benchmark Brent crude was trading at $28.93 per barrel on Friday, enjoying levels 60 percent above last year's average and 20 percent above values at the start of this year.

The IEA said there was a possibility of major difficulties in the supply of gasoline during the peak demand season of the northern hemisphere summer due to low refinery profit margins.

And the deterrent effect of higher crude prices on consumption prompted the agency to lower its projection for global oil demand growth this year by 130,000 bpd.

IEA demand expert Deborah White said high prices tended to cut demand where oil taxes were low, such as in the United States and in some non-industrialised countries.

It also tended to crush domestic consumption in independent exporters free of OPEC constraints like Russia, which would export as much as possible at the expense of domestic supply.

The agency saw a 1.9 million bpd drawdown in global oil inventories in the first quarter of 2000 as supply constrained by the OPEC oil cartel continued to fall short of demand.

It saw oil demand growth continuing to outpace non-OPEC supply growth, adding crude demand might rise in the second quarter as refineries raise runs to rebuild product stocks.

The IEA noted producers preparing strategy for the second quarter were worried about that season's traditional fall in consumption in the lull before the driving season.

CRUDE DEMAND RISING

But while end-user demand might decline then, crude demand usually rose to re-stock inventories, the IEA noted.

"Crude and products are separated by time; from the loading jetty at (Saudi Arabia's port of) Ras Tanura to the gasoline pump in Kansas is about two months," it said.

The IEA said there was a risk of an imbalance in the U.S. and European gasoline markets until refinery activity picked up.

"The most problematic factor...is refining margins," it said. "Low margins have delayed stockbuilding, which could lead to major difficulties with gasoline supply this summer."

Refiners were reluctant to store oil when a prompt price premium meant keeping unsold volumes in tanks lost money.

The IEA estimated OPEC oil exporters held sustainable spare output capacity of 5.4 million bpd, with three million of that enjoyed by Saudi Arabia and only 200,000 bpd by Venezuela.

The concentration of spare capacity in only a few countries could complicate the allocation of any volume increases, assuming output rises lowered prices, the report suggested.

"Countries with little spare capacity have little to gain by an overall output increase, since beyond a certain point, they would not be able to raise their own production," it said.

-- - (x@xxx.com), March 10, 2000

Answers

http://www.cano e.ca/ReutersNews/ENERGY-IEA.html

-- - (x@xxx.com), March 10, 2000.