Oil markets remain tight with stocks falling despite higher Opec output this
quarter. Slow growth in non-Opec supply continues to support high oil
prices, despite fears about the economy.
Cold weather and non-Opec supply shortfalls are keeping the oil market tight as winter begins. But fears of an economic slowdown and higher Opec output are capping price expectations. Industry stocks fell again this quarter, contributing to a surge in tanker rates as buyers scrambled to secure crude after refiners boosted runs to meet the seasonal peak in demand.
More oil is still needed from Opec to restore the balance of global supply and demand and halt the extended stockdraw. Opec now acknowledges that non-Opec supply has grown much more slowly this year than it originally expected. But the organisation continues to restrict output, forcing the industry to draw on stocks to meet rising oil demand. Opec’s latest balance for this year indicates that Opec crude supply is running around 800,000 b/d below what the market requires to meet demand.
Forecasts for next year differ greatly, providing Opec with plenty of scope for delay over raising output quotas. Opec sees a 300,000 b/d decline in the demand for its crude in 2008 as rising non-Opec and Opec NGL supplies exceed demand growth. But Argus and the IEA — for different reasons — expect a 500,000 b/d increase. The IEA sees a rebound in global oil demand growth to 2.1mn b/d, which exceeds a combined 1.6mn b/d increase in non-Opec and Opec NGL supplies. Argus expects slower growth in both global oil demand and non-Opec and Opec NGL supplies.
Over-optimistic forecasts of strong growth in non-Opec supplies are partly to blame for high oil prices, as they influence Opec’s output decisions. Argus now expects non-Opec supply — excluding Angola — to rise by only 400,000 b/d this year. This compares with forecasts of non-Opec growth made a year ago of 1mn b/d by Argus, 1.3mn b/d by the IEA and 1.6mn b/d by Opec. Although Argus takes a cautious view of non-Opec supply for next year, expecting growth of only 400,000 b/d in 2008 as well, both the IEA and Opec persist with much higher forecasts.
With global inventories down sharply since the northern hemisphere summer and likely to fall further this winter unless the weather is mild, Opec should not rely on non-Opec output growth to fill the gap between supply and demand, as it did this year. Argus sees forward cover provided by OECD industry stocks falling to 52 days by the end of this year — the lowest level for two years — and further draws next year would take inventories close to their historical low of around 50 days. Outside the OECD, where governments mandate minimum strategic stock requirements, stocks are already much lower as demonstrated by recent fuel rationing in China.
Paradoxically, worries about the global economy threaten to prolong market tightness. Although oil prices close to $100/bl finally persuaded Opec to boost supply by nearly 500,000 b/d this quarter, fears of a possible price collapse next year are inhibiting further output increases. Calls for higher output quotas were rejected at Opec’s recent meeting in Abu Dhabi, and Saudi Arabia narrowed formula-price discounts for January, discouraging purchases by refiners. But with demand for transport fuels still growing — unless the economy goes into recession — Opec needs to boost crude supply again next year if further oil price spikes are to be avoided.
