OIL PRICE OUTLOOK? LOOK OUT!

OIL PRICE OUTLOOK ? LOOK OUT !

Andrew McKillop

June 2011

STRANGE NUMBERS

The OECD’s energy agency, the IEA, like the US lookalike EIA always delivers rapid-changing estimates and forecasts of any key figure on oil: stocks, refinery runs, production in OPEC and OECD countries, demand by China and India, and world demand change as forecasts of economic growth or recession also change.

The key figure for oil analysts and traders – the “call on OPEC” or the amount of net exports needed from the exporter cartel – certainly changes, like the others, but is today a strange number.

The most recent estimates from the IEA in its June Oil Market Report for call on OPEC is no different. It says the 12 OPEC members exported a net amount of 29.18 million barrels a day (Mbd) in May, about 210 000 a day more than in April, but will need to hike this to a suspiciously exact and unlikely 30.5 Mbd by July, and hold that level right through December – if not prices are likely to come under a lot of pressure on the upside.

The missing link is an increase of exports from Saudi Arabia, whose total production was a claimed 9 Mbd in May. The problem is that previous IEA and EIA estimates of Saudi production, estimates by Saudi Aramco the Kingdom’s monopoly player in oil, and highly variable estimates of domestic oil demand in the Kingdom from other sources all give different figures for the key number needed: net exports from Saudi Arabia.

Whatever the Kingdom was producing up to end-May, it now has to raise output to well above 10 Mbd and hold it the rest of the year. One question is whether it really wants to do that, with a sure and certain fall of prices and lower revenues to royal coffers and a lot of petrodollar hungry princes. The second question is can it do it ?

THE USUAL NUMBERS

One way of finding what the call on OPEC really is, is to estimate what OPEC’s net export capacity has to be to satisfy world oil import demand after all other non-OPEC exporter supply is counted. If we do that, and take account of both and big and small holes in non-OPEC capacities and supply – ranging from Libya and Egypt through Yemen and Tunisia with Syria threatening a cut – the call on OPEC jumps around 1.6 Mbd to over 32 Mbd. There is no way Saudi Arabia could make up that gap.

The official-type reassuring number from the IEA, to balance world supply and demand for the next 3 months, is around 30.1 to 30.8 Mbd, depending on how IEA figures are interpreted. If this all sounds a little confusing to you: relax, this is the world of oil.

IEA number-spinning has to wage a constant war on loss of supplies. These range from regular outages to all out surprises, and not terror-hungry OPEC leaders using their Oil Weapon to menace innocent consumers. Some losses are able to be called disruptions and accidents, whether routine – or spectacular like last year’s blow-out of BP’s deep offshore well in the US Gulf of Mexico.

Routine disruptions at ageing fields like the North Sea, Alaska’s North Slope, in South America, Africa and Russia can extend as high as 0.5 Mbd at any one time. Although we are only at mid-year, the IEA has felt it can reduce its forecast for non-OPEC production losses for whole-year 2011, cutting total production loss estimates by 400 000 barrels a day, and setting total non-OPEC production as 53.3 Mbd. In turn, this makes estimates for total net export capacity outside OPEC as hard to exceed 22 Mbd, of which around 45 percent is supplied by one country: Russia.

The call on Russia, which the IEA does not have as a category is easy to calculate. This non-OPEC supply has to expand by 560 000 barrels a day the rest of this year.

Relative to last year’s non-OPEC production growth of about 1.1 Mbd this could appear both feasible and reassuring – but it totally ignores Arab spring revolt and its sequels. which we can summarize this way. IEA output hikes by Saudi Arabia and Russia are easy to calculate but they have to happen, first, while surprises like Arab spring/Jasmine revolt do happen.

IEA OPTIMISM

The IEA’s basic mission is simple: keep oil prices down by official optimism on robust global supply and moderate demand growth in its 28 member nations, and major non-OECD oil consumer countries, especially China and India. This is a nice hope, but for 2011, mainly due to China, India and other emerging economies, the IEA has had to raise forecasts for year average oil consumption by 1.3 Mbd to 89.3 Mbd, a hike of 100 000 a day more than its May prediction. It also raised 2010 estimates by the same amount, with a big implication for oil stocks of IEA member countries.

Total oil consumption by the IEA’s member countries was estimated by the agency at 45.18 Mbd in April. Stockpiles held by companies in OECD countries were raised by 34.5 million barrels to 2.67 billion barrels in April. This is equivalent to 59.1 days worth of consumption, far below the published, optimistic and official IEA goal of 90 days.

The short feedback on these IEA estimates and forecasts returns us to the call on OPEC. It must provide 30.1 to 30.7 million barrels a day on average, through the whole year of 2011, if we take the IEA’s monthly oil market report for June 2011 as credible. This is 400 000 barrels a day more than the agency estimated in May, instantly explaining the fast and radical uptick in oil prices when oil traders heard the politicized, dispute-riddled results of the June 8 OPEC meeting in Vienna, before marking them down again right away, as global economic crisis returned to the headlines, and Saudi rulers boasted of hiking oil production in the Kingdom “by July”.

The bottom line for the IEA is stay optimistic and hope both OPEC and non-OPEC suppliers will heed the call. Its June market report concluded, tentatively, there are “reassuring signs” that OPEC members -that is Saudi Arabia – are able to, and want to hike output. The outlook for that a whole lot less than sure, and getting less every day.

COPYRIGHT AMK 2011