The gloom which descended on world oil markets over a year ago shows no signs of lifting. The supply and demand fundamentals in 1999 could be a near-repeat of last year's dim performance when crude prices in real terms tumbled to their lowest level since 1973-74.
The price of Brent blend, the global benchmark, last year averaged below $13.56 a barrel, the lowest since 1976, compared with an average of $19.8 during 1996-97. A continuing supply-glut, weak energy demand amid economic stagnation or depression in Japan, south-east Asia, Russia and Latin America indicate little upside potential for oil over the next six to 12 months.
Middle Eastern producers will, therefore, face another difficult year of faltering revenues. A milder 1998 northern hemisphere winter, which led to huge stockpiling of crude and refined products and recessionary conditions in the Asia-Pacific rim (previously a major growth area for energy consumption) had a profound effect on oil markets.
The Paris-based International Energy Agency (IEA) estimated that total purchasing in Asia (including Japan) was 900,000 barrels lower during 1998 than in the previous year.
The IEA observes that entire global demand rose by only 800,000 barrels in 1998. On the supply side, world production rose to record highs, boosted by an increase of over 2.2 million barrels per day (b/d) in Iraqi output, under an enhanced UN oil for food programme, coupled with higher OPEC and non-OPEC output.
Despite pledges by OPEC members to curtail output, the cartel's oil exports rose by two per cent in 1998 to an average 26.4 million b/d. The commissioning of additional capacity in the North Sea, and exploration and development works in West Africa and Latin America contributed to increases in non-OPEC output during 1997-98.
A combination of factors may prevent a rally in the oil markets in 1999. Firstly, global oil stocks remain excessively high in the Organisation for Economic Cooperation and Development (OECD) economies. Industry stocks in the OECD are estimated to represent 58 days forward consumption. Experts say inventories would have to fall by at least 400 million barrels in order to uplift crude prices.
Even a cold northern winter would not eliminate the stocks. Thus a massive overhang of inventories will continue to undermine prices.
Earlier predictions of a severe northern winter have proved to be incorrect. Harsh seasonal weather would have led to an increase in consumption, and a much needed...