CGES: Winter of discontent ahead for oil prices

LONDONSevere weather this winter could disrupt shaky oil prices as the market is pulled between a shortage of middle distillates for consumers and an oversupply of heavy sour crude production, according to the Center for Global Energy Studies (CGES), London. As the winter heating season approaches, middle distillate stocks in the Atlantic Basin sit at record lows, said CGES in its monthly oil report, released Monday. Although refiners have made the switch to maximum distillate yields and are running at full throttle, stocks have "barely risen in recent months." It said, "Strong demand, including restocking by German heating oil consumers, is absorbing everything refiners can produce. At the end of August, middle distillate stocks in the US and Europe were 89 million bbl down on a year ago." For an oil market already thrown off balance by "growing concern from consumers about high prices and possible shortages," panic buying or hoarding by consumers has the potential to "force prices up sharply" this winter when refiners cannot raise output to meet an upsurge in demand. CGES said any further increase to recently raised output by the 11 nations of the Organization of Petroleum Exporting Countries will do little to counteract price spikes this winter "as any extra crude produced now will not reach consumers in time. OPEC needs to have boosted output much earlier in the year to allow product stocks to have been rebuilt before winterit is now too late." CGES said OPEC's decision on Sept. 10 to pump an extra 800,000 b/d of oil on to the marketa figure CGES calls "insubstantial" given that ongoing overproduction from member states accounts for some 730,000 b/dmeant that "all crude prices lost was froth." It said, "High crude prices in the Atlantic Basin indicate an acute shortage of middle distillates, rather than a need for more OPEC supply. Pushing more crude onto the market will only serve to widen the differential between heavy sour and light sweet crudes and tip the Dubai market further into contango. "Oil prices will remain very sensitive to any disruption until the winter is over and product stocks are rebuilt," CGES added. "The recent blockade of distribution depots in France and the UK has shown how easy it is to [do so] with stocks so low." The report forecasts further problems on the horizon for the oil price unless OPEC makes a "dramatic" cut to output next spring. Because OPEC is already producing 1.3 million b/d more than the market needs for 2001, notes CGES, the bottom could fall out of the per barrel price without such a measure. With "crunch [coming] early in 2001" when winter demand eases off and crude stocks are topped up, "OPEC will have to act quickly once prices start to fall if it is to engineer a soft landing," or else risk sending prices into free fall. "Should OPEC maintain its expected fourth quarter 2000 output level of 29.3 million b/d throughout 2001," CGES cautioned, "prices would plunge back towards the $10/bbl level by the end of next year." CGES calculates a "normal" winter in the Northern Hemisphere would require OPEC to restrain output in the second quarter of 2001 by 1.8 million b/d, cutting total collective production to 27.5 million b/d, in order to hit an average Brent crude price of $24.30/bbl for the year. OPEC has stated it wants an oil price in the mid-$20/bbl range. A "mild" winter scenario would require OPEC agree to make an earlier cut to output. CGES said a reduction to 28 million b/d at the beginning of 2001 would drive prices as low as $21.50/bbl by the summer. Whereas a "cold" winter, according to the CGES report, would need only a "brief" production cut in the second quarter of 2001, followed by a return to 29 million b/d in the next quarter.

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-- Martin Thompson (mthom1927@aol.com), September 20, 2000

Answers

It seems just about everybody overlooks the significance of "lead times." The time it takes between drilling and end-use delivery means everything. In the oil business this is a ponderous element of marketing and distribution, and will have a great impact upon price.

-- JackW (jpayne@webtv.net), September 20, 2000.