Analysts’ expectations earlier this year that global oil demand in the fourth quarter would mirror the unusual surge seen in 2004 and outstrip available supply have been challenged more recently by views that demand will be softer than previously forecast. In its latest Monthly Oil Market Report, OPEC played down concerns about the gap between its capacity and projected end-of-year demand. As OPEC’s 15 June meeting looms, Bill Farren-Price assesses the latest views on demand and whether OPEC’s stock-building supply policy, which has lifted US crude stocks above five-year averages, will continue to receive unquestioned support when OPEC ministers meet in Vienna next month.
Public comments by OPEC oil ministers in recent weeks have demonstrated that the quiet consensus view prevailing in March and April – that US stocks needed to build in order to allow for a higher-than-normal seasonal drawdown in the fourth quarter – may be vulnerable. The rise in US oil inventories has been one of the factors helping to pressure NYMEX crude futures below the $50/B level in May, prompting some OPEC ministers to voice concerns about the policy, although Kuwait, Saudi Arabia and even Iran have most recently maintained the view that production needs to be maintained at present historic-high levels in order to bring oil prices down into a more comfortable range. Further cementing its commitment to its own capacity expansion, Saudi Arabia reiterated its commitment to raising supply to meet demand in comments published by SPA on 23 May. Saudi Oil Minister Ali Naimi said the kingdom had increased output to meet the expected increase in 4Q demand and had no plans to cut output despite rising US stock levels.
Kuwaiti Energy Minister and OPEC President Shaikh Ahmad al-Fahd al-Sabah appeared to echo this view, telling Reuters on 23 May there was no need to cut production and that output would continue over and above quotas to allow stock-building to continue. But Shaikh Ahmad cautioned that a downward revision in demand growth forecasts in the second half of the year might require a change in OPEC thinking. Iran’s Oil Minister Bijan Zanganeh said on 25 May that OPEC could not cut overproduction due to high demand from consumers and that the organization was content to see an easing of prices towards the $40/B level. “It would be better if [OPEC] could get back to within its quota but that is not possible because of market demand,” he added. But Qatar’s oil minister ʹAbd Allah al-ʹAttiyah has sounded a note of caution, warning that oil stocks are growing too fast. “This is something we have to talk about at our next meeting,” Mr ʹAttiyah said on 23 May. “I’m concerned that stocks are building too quickly. We have to be very careful.”
OPEC’s Optimism
Certainly OPEC and its senior member countries have no interest in playing up the possibility of a supply crunch in 4Q. In its May Monthly Oil Market Report, OPEC said the fact that it was producing now in excess of 30mn b/d meant that it would be able to fulfill the call on its crude of 30.53mn b/d it forecasts for 4Q 2005 (MEES, 23 May). “The lifting of this ‘fear factor’ should further ease the market, bringing prices closer to the levels justified by fundamentals and supportive of healthy economic growth,” the report said, in reference to concerns over an end of year supply shortfall.
But despite this optimism, OPEC insiders accept that there is a fine balance between assuring markets on adequate future supplies and allowing stocks to build now in expectation of demand later in the year on the one hand; and on the other, keeping supply policy closely matched to the constantly-changing estimates for year-end demand. Forecasts for 4Q demand are critical to OPEC’s present supply policies – and recent forecasts have begun to shave the outright demand numbers slightly. Only time will tell whether this turns into a trend. OPEC’s latest view for the call on its crude in 4Q actually rose in May to 30.53mn b/d from the 30.42mn b/d figure published in the April report due to lower estimates of non-OPEC output – but the call figure obscures a slight decline in the global demand figure – to 85.77mn b/d from 85.83mn b/d for the quarter.
Analysts’ Views
Some analysts have started to respond to the first signs of a weakening in demand forecasts. In its Global Crude Oil Market Outlook of May, Energy Security Analysis Inc (ESAI) forecast that oil prices would continue a more gradual decline through the remainder of the second and third quarters, but staying above $45/B, assuming OPEC maintains its current high production level. ESAI questioned oil market concerns about demand growth in the second half of the year, forecasting global demand to grow by 1.3mn b/d in 3Q compared to the second quarter, growth that would still leave total global demand below the levels reached in 1Q, when colder temperatures boosted distillate demand globally. “Even in the fourth quarter, with demand rising by nearly 2mn b/d from the previous quarter, the call on OPEC will only grow by 1.1mn b/d, thanks to strong non-OPEC growth in several regions,” the report said, adding “all things being equal, the fundamental picture does not appear to support the widespread concerns in the market”.
The view that 4Q demand will be softer than expected may be giving private comfort to OPEC decision-makers, who have done all possible to bring prices down below $50/B. But the nervousness about a sustained decline in prices driven by softer demand views and a build-up in stocks remains just below the surface. While Saudi Arabia has been consistent on its commitment to supply well above quotas in support of the stock-building policy, other OPEC ministers have indicated nervousness at moments of downside volatility in recent weeks. As Société Générale noted in its Weekly Oils comment on 23 May, faced with a sharp and swift decline in prices, OPEC President Shaikh Ahmad had calmed the fervor of sellers by indicating that OPEC could decide to reduce its output at the June meeting if stocks continued to rise at the same pace but then appeared to contradict this the following day when he said he had no problem with OECD forward cover rising to 55 days. “This U-turn is a reminder, if one was needed, that only Saudi Arabia’s word counts and that references to prices being too volatile have been replaced with stock targets” SG said. The report added that the policy of building precautionary stocks to deal with peak winter demand had been crucial.
