Message-ID: <28083132.1075856597853.JavaMail.evans@thyme> Date: Wed, 20 Dec 2000 15:57:00 -0800 (PST) From: webmaster@cera.com Subject: CERA Monthly Oil Briefing - CERA Alert - December 20, 2000 Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: "Webmaster@cera.com" X-To: X-cc: X-bcc: X-Folder: \Vincent_Kaminski_Jun2001_5\Notes Folders\Cera X-Origin: Kaminski-V X-FileName: vkamins.nsf TITLE: CERA Monthly Oil Briefing: Fundamentals Update E-mail Category: CERA Monthly Briefing CERA Knowledge Area: World Oil In the past two weeks, oil prices have sold off the premium or price strength that had been built into the market in anticipation of possible shortages this winter. The exact cause of the sharp switch in market psychology is hard to pinpoint but seems to be a combination of very early signs that the oil stock situation is at least stabilizing, even if stocks have not built substantially, and that, thus far, despite a few weeks of colder-than-normal temperatures, heating oil supply has been adequate to meet demand in the key US market. That has allayed some of the concerns that were driving speculative interest into the market. Furthermore, the potential for weakness in the US economy may be creating expectations for weaker oil demand in 2001. The change in market psychology was dramatically illustrated when news that Iraq was cutting off exports caused prices to slide, yet, the Iraqi export cutoff is having a concrete effect on fundamentals. If the cutoff lasts through December, the effect will be pronounced-it would turn a projected fourth quarter 2000 stockbuild of 0.5 million barrels per day (mbd) into a stockdraw of 0.1 mbd. We expect Iraqi production levels to remain erratic because of its dispute with the UN Security Council over sanctions, and exports may again cease. At some point such a development would have a price supportive effect. CERA's price outlook for 2001 remains the same as that in the World Oil Watch released in late November. Assuming normal winter weather and no prolonged or repeated shutdowns of Iraqi production, the projected average for first quarter 2001 is $29 per barrel for WTI. However, this outlook is based on OPEC's announcing an agreement early in the first quarter to cut its production by the start of the second quarter. A failure to restrain output would result in a downward adjustment to an average of $27 WTI for the first quarter of 2001, with prices lower in the second half of the quarter than in the first. The downward pressure results from the prospect of a larger-than-usual implied build in stocks during the second quarter of about 3.0 mbd-with a cut in OPEC output. Iraq in a Twilight Zone As anticipated, Iraq ceased exporting oil under the UN-controlled "oil for food" program as of December 1 in protest over the rejection by the Security Council's sanctions committee of its proposed December export price schedule.* Iraq's pricing was judged by the UN overseers, who monitor the export program and advise the sanctions committee, to be about 60 cents per barrel below comparable crudes in an apparent attempt to offset an illicit surcharge that Iraq was seeking from buyers. Although the standoff with the sanctions committee continues, Iraq partially resumed exporting on December 13. Since then, about 1 mbd has been exported from the Mina al-Bakr terminal in the Persian Gulf. Prior to the shutdown, Iraqi exports under UN auspices were at a rate of 2.21 mbd for November, as compared with 2.08 mbd for the third quarter. Exports for November were about 1.3 mbd from Mina al-Bakr and about 0.9 mbd from Ceyhan in the Mediterranean. Exports from Ceyhan have not resumed, owing to the surcharge dispute, with the result that about 1.2 mbd of Iraqi crude remains off the market. Iraq's semi-shutdown has put it into a kind of twilight zone while its dispute with the sanctions committee over pricing continues. (In the midst of this dispute, the UN Security Council approved phase nine of the oil-for-food program at the last minute on December 5; it became effective on December 6 and has been accepted by Iraq). As of December19, Iraq's revised export price for Ceyhan, proposed for the remainder of December, has again been judged too low by the overseers and is expected to be rejected by the sanctions committee. Additionally, the overseers have notified lifters of Iraqi crude that any oil payment made directly to Iraq rather than to the UN escrow account would be a violation of UN sanctions. Buyers of Iraqi oil from Mina al-Bakr have consistently been reported as saying that they are not paying a surcharge to Iraq. How long Iraq may operate at about half capacity is unclear, but it continues to request a surcharge payment from prospective lifters at Ceyhan in an apparent effort to circumvent and degrade the UN financial controls that are the heart of the sanctions system. The distinction that Iraq has made between Mina al-Bakr and Ceyhan arose when it resumed operations at Mina al-Bakr by loading two cargoes for the India Oil Company. Iraq may have judged this accommodation to be in its interest, since it recently also signed an oil exploration contract with India under which payments would be made in oil. As currently structured, the deal would violate UN sanctions, but India is seeking an exception from the Security Council on grounds of economic hardship. The exception seems unlikely to be granted, which may lead Iraq to cease exports from Mina al-Bakr again. There are many possible scenarios that Iraq could follow, but we expect uncertainty about Iraqi exports to continue as Iraq uses its oil exports as leverage to undermine sanctions in its ongoing struggle with the Security Council to end all restraints. Consequently, the Iraq factor will remain an element in the oil price outlook. Iraq's antisanctions campaign has also raised the visibility of the Iraq issue in Washington as the incoming Bush administration prepares to take office. Secretary of State-designate Colin Powell has already acknowledged a need to reassess Iraq policy and has said that he would work to "reenergize" sanctions. The Iraq issue is being debated in virtually every foreign policy-oriented think tank in Washington. A consensus seems to be emerging around seeking renewed international support and legitimacy for sanctions by retaining UN control over Iraq's oil revenue and strictly enforcing a prohibition on sales of weapons and related material while lifting general trade controls that increasingly are both ineffective and an international irritant. There is virtually no sentiment in favor of operations to destabilize or remove the Saddam Hussein regime on the pragmatic basis that the prospects for success are remote. Demand Trends Record high US natural gas prices have increased the economic incentive for gas consumers with the capability to switch from gas to distillate to do so, and reports of switching are emerging in a number of areas. Interruptible gas customers with resid or distillate fuel back-up have already switched to oil, so it is now firm gas supply customers with the potential to add to the already high level of distillate demand. So far in December US distillate demand is running at a record high December level of 3.9 mbd. However, only a small portion of this demand is the result of economically based fuel-switching from gas to distillate. CERA estimates that the additional demand likely to come from further switching of gas to distillate is relatively small, on the order of 0.1 to 0.2 mbd. In CERA's view it is likely that only a portion of the theoretical capacity will be switched on short notice because in some cases, this theoretically switchable capacity has not been used in recent years, and tankage and delivery infrastructure may be in uncertain condition. Switching by interruptible gas customers (such as utilities) to distillate began about a month or more ago, although the volumes involved are relatively small. Switching to residual fuel already occurred months ago when gas prices started to surge in the summer. A portion of the US secondary and tertiary distillate stockbuild seen this autumn was likely prompted by interruptible gas customers filling their reserve distillate fuel storage. Given the expectations of a tight gas market, regulators have been explicit about enforcing back-up fuel storage requirements in the months leading up to the current heating season. Other end users of natural gas have few or no options for fuel switching. Some ammonia and ethane producers have shut down operations because the cost of feedstock natural gas is high. Natural gas is also used in some enhanced oil recovery operations, and some of these producers have also opted to sell gas back to the grid rather than produce oil. Supply Trends Non-OPEC supply for the fourth quarter is expected to be up 0.9 mbd over a year earlier at 46.4 mbd. Recent events include a shortfall in Mexican production, curtailed in October by about 300,000 bd owing to the effects of Hurricane Keith. Mexico's fourth quarter liquids production is expected to be 3.64 mbd-about 95 percent of Mexican liquids capacity. Norway's output increased 200,000 bd from October to November as maintenance season ended. Norway's production for the fourth quarter is expected to be 3.53 mbd.* Growing Russian crude oil production throughout the year is supporting a recent surge in exports, in spite of higher export taxes. Russian exports of domestic oil production (excluding transit volumes) reached 2.5 mbd in November, after remaining fairly steady at about 2.35 mbd from July though October. Fourth quarter oil exports are expected to average 2.5 mbd, 0.3 mbd greater than in the fourth quarter 1999. CERA estimates Iraqi oil production averaged 2.91 mbd in November-down 0.1 mbd from the October level. The cutoff in exports earlier this month reduced Iraqi output for the first 12 days of December to roughly 0.8 mbd. Iraq resumed exports of about 1 mbd on December 13, which raised production to 1.80 mbd. Assuming no change in Iraq's current production stance, Iraqi production would average 1.41 mbd for December. On a quarterly basis, the decline in Iraq output would lead to estimated OPEC output in the fourth quarter of 29.0 mbd and would turn an estimated global oil stockbuild of 0.5 mbd into a stockdraw of 0.1 mbd. These production estimates include 0.15 mbd of crude oil exports to Syria that began on November 20 without UN authorization and are continuing. Oil Stocks US crude oil inventories (DOE data) have climbed intermittently from an annual low of 280 million barrels in September and reached 292 million barrels in mid-December (see Figure 1). Since prices weakened in late November, crude oil stocks have stabilized above the annual low in September and the ranges seen in October to levels from 289-292 million barrels. Primary inventories of US heating oil remain well below year-earlier levels; at 48 million barrels they are 15 million barrels, or 24 percent less, than those of a year ago, but there are indications of builds in secondary and tertiary inventories. We estimate that wholesale and consumer stocks are up 5-10 million barrels since August and are actually higher than they were at the end of last year. In Europe crude oil stocks are at more comfortable levels when compared with those of the United States. In November stocks rose nearly 9 million barrels to 426 million barrels. At this level they are below the highs of 1999 but well above the low levels of early 1996 (see Figure 2). Japanese crude oil inventories at end-October were 107.6 million barrels, which is above the record low set earlier this year but still well below levels seen in recent years (see Figure 3). ********************************************************* Come Shoot the Rapids with us at CERAWeek2001, "Shooting the Rapids: Strategies and Risks for the Energy Future" in Houston, February 12-16, 2001!? For more information and to register, please visit http://www20.cera.com/ceraweek/ ********************************************************* ********************************************************************** To make changes to your cera.com account go to: http://www20.cera.com/client/updateaccount Forgot your username and password? Go to: http://www20.cera.com/client/forgot This electronic message and attachments, if any, contain information from Cambridge Energy Research Associates, Inc. (CERA) which is confidential and may be privileged. 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