Analysts Say Oil Stockpiles Could Vanish By Late Fall

Friday, September 10, 1999
Excess oil industry stockpiles are likely to disappear entirely in October or November as winter demand overwhelms supply constrained by OPEC export curbs, analysts said. Inventory statistics, always key to the international oil market, have assumed an even greater significance over the past week as OPEC officials singled out the indicator as the leading factor for judging when to ease supply limits. Now, even the most cautious of analysts expect OPEC's target of shrinking stockpiles to pre-1998 levels to be achieved before the end of the year - at least three months before an agreement on output cuts expires. "With no schedule for another quota review before March 2000, they run a danger of creating an unsustainable shortage before the year-end," said a spokesperson from Standard Bank of London. That could force OPEC to reconsider its policy not long after its late-September ministerial conference, unless it is prepared to risk uncontrolled leakage by member countries tempted by higher prices. "The criteria that Saudi Arabia has set as the guiding reference for increased production - higher prices, lower stocks and signs of increasing demand - are likely to be met by November at the latest," Washington consultancy Petroleum Finance Corp. officials said. "If a negotiated increase does not occur in September it is likely that prices will force the organization to reconsider its strategy as early as October if an uncontrolled market share battle is to be avoided." Tanker tracking consultancy petrologistics estimated last week that high prices - benchmark Brent is now trading at $21 a barrel - had already reduced OPEC adherence to output curbs to about 80 percent. Ministers have made clear their September conference will retain emergency supply limits through March 2000 to make sure surplus stockpiles that caused last year's oil price crash are completely erased. They have said they want to see commercial stocks return to the levels of 1997, when benchmark Brent averaged just over $19 a barrel. Clues to OPEC thinking came last week when the oil minister of Mexico, the leading non-OPEC collaborator with OPEC's output cuts, said the country expects stockpiles to have eased to 1997 levels by the end of the year. Mexican Oil Minister Luis Tellez made the statement after a meeting with OPEC oil ministers from Saudi Arabia and Venezuela, during which they suggested they too may be thinking along the same lines. OPEC's problem is that reliable inventory data is not readily available. While the oil market is now planning for the winter, July data on stocks will only be published by the intergovernmental International Energy Agency next week. OPEC's cautious stand was encouraged last month by a large upward correction to inventory data to the end of May by the IEA. While the rate of decline in stocks is uncertain, largely because growth in demand has proved difficult to predict, the IEA and independent analysts agree that there will be large supply shortfall in the final quarter of the year. Complicating matters, there are three components to measure for commercial global oil stocks. Those held by companies in the industrialized nations of the Organization for Economic Cooperation and Development (OECD) are most important because the OECD consumers two-thirds of world oil. Non-OECD and floating storage make up the balance and in addition are the fairly stable strategic stocks held by governments. The IEA says commercial OECD stocks peaked in August 1998 at 2.82 billion barrels. By the end of June this year those stocks had fallen to 2.72 billion barrels, still well in excess of the 2.6 billion recorded at end-June 1997. The IEA is now projecting a third quarter supply deficit of more than one million bpd. Assuming OECD industry stocks account for two-thirds of the decline the total would fall to 2.64 billion by end-September, more than wiping out the excess against September 1997 levels. Petroleum Finance says slow demand growth will prevent stocks from plummeting quite that quickly. It predicts a third quarter OECD draw of 500,000 bpd but expects a 1.8 million bpd reduction in the fourth quarter. Even assuming OPEC leaks to 27 million bpd in the fourth quarter, versus an IEA estimate of 26.1 million, the agency's projections are for a fourth quarter decline of over two million bpd. That would slice global inventories by 190 million barrels. In the OECD, stocks would decline 125 million barrels, reducing the total OECD stockpile to 2.52 billion - 130 million below December 1997 and the lowest end-year levels since 1985.

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