Oil’s not Well

12 December 2004

In the latest Oil Market Report, the IEA has kept its projection of oil demand for 2004 unchanged at 82.4 million barrels per day, and trimmed its previous growth forecast for 2005 by 80k barrels per day, bringing it down to 83.8 mbpd. The IEA projected a slower rate of growth in demand next year because of an expected slowdown in economic growth and oil demand in China. That slowdown, however, remains a major wildcard.

A 500 kbpd drop in OPEC output—driven by disruptions to Iraqi exports from insurgent attacks—cut the world oil supply by 40 kbpd to 84.4 mbpd in November. The OPEC drop was largely offset by 420 kbpd of production coming from offshore China and restored in the US Gulf of Mexico. Russian growth eased and the IEA also revised down its estimate of supplies coming from OECD countries. Non-OPEC supply growth remains at 1.1 mbpd for 2004 and is revised down to 1.2 mb/d for 2005—in other words, not as much new oil as originally expected is now thought to come next year from  the non-OPEC regions.

The IEA tagged this latest forecasts with caveats about potential upside risk from  the weather, geopolitical issues, low spare capacity, and economic uncertainty along with the Chinese wildcard.

Despite the forecast—which by my reading shows us with a fairly paltry 2 mbpd cushion between supply and demand—producers say they are worrying about a drastic drop in oil prices (a fear the IEA dryly termed “somewhat overstated”). OPEC now plans a 1 mbpd production cut to keep prices buoyed. 

Assuming OPEC follows through on that cut, and assuming that the IEA is correct in predicting slower oil production growth for non-OPEC suppliers next year, the world will find itself once again with very little margin. Of course, the OPEC producers proclaim themselves ready to increase production in the event of another crisis.

The Saudis will make the largest cut—500 kbpd. Earlier in the year, Saudi Prince Bandar insisted that “We will not allow shortage of the markets of oil in the market to increase the prices,” and that the Saudi Arabia would like to see the price of oil to be “between $22 and $28 a barrel.”

Looks like that target price has risen a bit. Given that the global economy didn’t suffer much during the $50+ prices earlier in the year, the OPEC countries have apparently decided to prolong their windfall. Iran has been advocating such a position for months. Trimming the rate of production prolongs the length of production—and the OPEC countries clearly are trying to strike the optimal balance between volume, duration and revenue for themselves.