Short - Term Outlook for the World Oil Market and Oil Price Supplement to the Short-term Energy Supply and Demand Outlook Presented at the 376th Regular Meeting of Research Briefings 1. Background of recent crude oil price hikes 2. Prospects for supply and demand fundamentals 3. Crude oil price scenarios December 24, 2002 Ken Koyama General Manager, Energy Strategy Department The Institute of Energy Economics, Japan 1
Conclusions Geopolitical factors dominate the crude oil price trend in the near future. Supply-demand fundamentals may soften from 2Q/2003 onward. Crude oil (WTI) price trend in 2003 differs greatly according to scenarios of Iraq conflicts and other issues: Stabilization Scenario : $24-25 (annual average, the same applicable below) Stalemate Scenario : $28-29 Conflict Spillover Scenario : $34-35 Wide fluctuation and high volatility inevitable. 2
1. Background of Recent Crude Oil Price Hikes 3
Crude Oil Prices after September 11th 34 ($/bbl) 32 30 WTI futures price 28 26 24 22 OPEC basket price 20 18 16 14 9/4 10/4 11/4 12/4 1/4 2/4 3/4 4/4 5/4 6/4 7/4 8/4 9/4 10/4 11/4 12/4 1/4 (Source) Prepared by IEEJ from NYMEX data, etc. 4
Intensifying Tensions over Iraqi Situation (Developments concerning WMD Inspections) Nov. 8, Resolution 1441 unanimously adopted by the UN Security Council: To provide Iraq with a final opportunity. Unconditional, unrestricted inspections, including of the Presidential Palace. Breaches and non-compliance to the resolution lead to serious consequences. Nov. 13, Iraq expressed its willingness to accept the resolution. Nov. 28, UN inspection team entered Iraq. Dec. 7, Iraqis submitted their WMD development report to the UN. Dec. 20, U.S. denounced the Iraqi report as containing grave breaches of the resolution. Jan. 27, 2003, Deadline for reporting of inspection results. On finding Iraqi non-compliance and breaches, the U.S. may initiate military action (enhancing military capability in the Gulf). 5
General Strike in Venezuela and Its Impacts In early December, the workers of Venezuela s state-run PDVSA initiated a general strike. Venezuela s oil output fell to below a million B/D from the pre-strike level (some 2.6 million B/D). It remains uncertain what kind of situation will develop after the strike and political stabilization. - Venezuela is the fourth largest crud oil supplier to the U.S. market. - It is heavy crude oil supplier to the Gulf market with a share of nearly 40%. - Venezuela (short-haul supply) vs Middle East ( Long-haul supply) - The U.S. market (inventory level) immediately suffers a sense of tightening. - The U.S. market (NYMEX) takes lead in determining the world s crude oil price. 6
Trends of US Oil Stocks (Private Stocks) (100 million barrels) 2.1 1.9 1.7 1.5 1.3 1.1 Gasoline Heating oil Gasoline (five-year average) Heating oil (five-year average) Crude oil Crude oil (three-year average) 3.5 3 2.5 2 1.5 1 0.5 0.9 0 97.1. 97.5. 97.9. 98.1. 98.5. 98.9. 99.1. 99.5. 99.9. 00.1. 00.5. 00.9. 01.1 01.5 01.9 02.1 02.5 02.9 03.1 (Source) Prepared by IEEJ from EIA publications. 7
Decisions Taken at the 122nd OPEC General Meeting As of November 2002, crude oil production by OPEC-10 except Iraq exceeded the existing quotas (21.70 million B/D) by about 2.40 million B/D (quota adherence below 60%). From the beginning of 2003, production quotas for OPEC-10 except Iraq will be increased by 1.30 million B/D to 23.00 million B/D. Concurrently, in the hope of encouraging compliance to the new quota, restraints on overproduction are called for. (The Saudis will notify customers of stepping up of supply cuts.) Aims: To re-establish credibility of OPEC with raised quotas + restraints on overproduction. To create room for production-quota adjustments for the next lowdemand season (2003/2Q). 8
2,900 2,800 2,700 2,600 Production Adjustment Records by OPEC 10 (10,000 B/D) Crude oil output by OPEC 10 (%) 3,000 100 Rate of compliance 90 80 70 60 2,500 2,400 2,300 2,200 2,100 2,000 Jan May Sep. Jan May Sep Jan May Sep Jan May Sep Jan May Sep 1998 1999 2000 2001 2002 50 40 30 20 10 0 (Source) Prepared by IEEJ from IEA, Oil Market Report. 9
Trading of Non-Commercials and WTI Futures Price (2002) (Long, 1,000 bbl) 80,000 WTI Futures price (USD/bbl) 32 60,000 Non-Commercials Net position 30 40,000 28 20,000 26 0 24-20,000 22-40,000 20-60,000 18 1/8 1/22 (Short, 1,000 bbl) 2/5 2/19 3/5 3/19 4/2 4/16 4/30 5/14 5/28 6/11 6/25 7/9 7/23 8/6 8/20 9/3 9/17 10/1 10/15 10/29 11/12 11/26 12/10 12/24 (Source) Prepared by IEEJ form NYMEX and CFTC publications. 10
2. Prospects for Supply and Demand Fundamentals 11
World s s Oil Demand Outlook in the Short Term (10,000 B/D) 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Rest of the world Asia/Pacific Europe North America Growth rate 7,160 7,310 7,360 7,540 7,620 7,650 7,670 7,780 1,480 1,470 1,500 1,530 1,570 1,570 1,600 1,620 1,890 1,990 1,940 2,040 2,070 2,090 2,090 2,130 1,570 1,580 1,610 1,590 1,600 1,590 1,600 1,580 2,390 2,400 2,220 2,270 2,310 2,380 2,400 2,430 1996 1997 1998 1999 2000 2001 2002 2003 (%) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 (Source) Prepared by IEEJ from IEA, Oil Market Report. 12
Chinese Oil Demand & Import Trends As a Key Element (10,000 B/D) 600 500 400 408 Consumption Net imports 419 449 479 488 514 523 300 200 100 89 100 130 156 158 174 179 0 1997 1998 1999 2000 2001 2002 2003 (Source) Prepared by IEEJ from IEA, Oil Market Report. 13
Non-OPEC Oil Production Trends 50 49 Unit: Million B/D Non-OPEC total (left scale) 10.0 9.5 48 USA (right scale) Russia (right scale) 9.0 47 8.5 46 8.0 45 7.5 44 7.0 43 6.5 42 6.0 41 5.5 40 5.0 95-1Q -3Q 96-1Q -3Q 97-1Q -3Q 98-1Q -3Q 99-1Q -3Q 00-1Q -3Q 01-1Q -3Q 02-1Q -3Q (Source) Prepared by IEEJ from IEA, Oil Market Report. 14
Non-OPEC Oil Production Outlook (Million B/D) 60 50 40 30 42.5 6.0 5.7 Rest of the world Asia/Pacific Latin America Former Soviet Union Europe North America Growth rate 43.6 44.5 44.9 44.9 6.1 6.3 6.4 6.4 5.9 6.1 6.2 6.2 6.6 6.5 6.4 6.4 3.0 3.3 3.4 3.6 3.8 3.8 3.8 7.1 7.1 7.2 7.3 7.5 7.9 8.6 9.4 10.1 46.0 46.6 48.0 6.7 6.6 3.9 49.3 6.9 6.6 4.0 10 9 8 7 6 5 4 20 7.0 6.8 6.6 6.9 6.9 6.9 7.0 6.9 6.8 3 10 14.5 14.1 14.3 14.6 14.0 14.3 14.6 14.4 14.9 2 1 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 0 (Source) Prepared by IEEJ from IEA, Oil Market Report. 15
OPEC Production after the General Meeting For Iraq, political factors will determine its output in the near future. For the remaining OPEC-10 (excluding Venezuela factor ), there are three possibilities: (1) Heading for output increases overall as a result of raised production quotas. (2) Actual output begins to decline to the level of new production quotas. (3) Continuing to supply as much as needed on market, with production little changed from present levels (Compliance rate to the new production quotas will improve). (1) and (2) less likely. 16
Basic Problems Surrounding OPEC Production Adjustment Extremely low oil price in 1998-1999 was the key factor for OPEC s successful concerted production cuts. Since 2001, however, OPEC has faced new challenges: demand stagnation, rising non OPEC production, and lower call on OPEC oil. The pursuit of market (price) stabilization lead to loss of market share, and fears for free ride by non-opec. Difficulties in strengthen production cuts under the existing massive excess capacity and prospects for growing production capacities. Significant output increases under present conditions can cause serious oversupplies in the next low-demand season. Incomplete information and difficulties in micro-management. 17
Short-term term Outlook for Oil Supply and Demand Balance (10,000 B/D) (10,000 B/D) 8,200 8,000 7,800 Oil supply 1,000 Stock buildups 800 600 7,600 7,400 7,200 7,000 6,800 Oil demand Production minus consumption (stock fluctuations) 216 90 96 20 40 30 0 (6) 16 (40) (60) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2001 2002 2003 400 200 0 (14) Stock drawdowns (200) (Note) Iraqi production assumed at a million B/D for 1Q / 2003 and 1.8 million B/D afterward; OPEC production quotas assumed at 23 million B/D, with the compliance rate put at 80%. 18 (Source) Up to 2002/3Q taken from IEA, Oil Market Report. Thereafter, forecast by the author.
3. Crude Oil Price Scenarios 19
Three Scenarios of Consequence of Military Attacks on Iraq (1) Iraq Stabilization Scenario Military objective (to get Saddam out) is achieved promptly. A stable regime is put in place. Very little impact on international oil market (similar to Gulf crisis?) Crude oil price begins to slump sharply in the second half of 2003. (2) Iraq Stalemate Scenario The overthrow of the present regime, if successful, destabilizes Iraq (with the presence of Shias in the south and Kurds in the north, the present mainstay becoming powerless). Intervention from neighboring areas and escalation of instability. Nervousness increases on international oil market also. Crude oil price stays high (at around $30) during the first half. Though falling later, it remains highly volatile. (3) Middle East Conflict Spillover Scenario Iraq counter-attacks Israel, making the Middle East unstable at a stroke. Even the moderates of the Mideast producers begin to use oil as a weapon. Crude oil price skyrockets, reaching more than $40 in the short-term. 20
Iraqi Oil Production Trend (10,000 B/D) 350 (Source) Prepared by IEEJ from IEA, Oil Market Report. 21 88 119 122 132 154 172 185201 167 173 186 176 164 183 188 227 220 218 213 213 232 243 243 243 245 236 241 254 250 267 250 240 276 280 286 282 237 261 265 256 252 200 226246 243 245 239 305 299 285 300 290 267 293 286 279 255 285 277 300 250 200 150 100 50 0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct 1998 1999 2000 2001 2002
Excess Production Capacity of OPEC Crude oil production capacity 02/11 output Excess capacity Overproduction above quotas Current production quotas (1,000 B/D) (1,000 B/D) (1,000 B/D) (1,000 B/D) (1,000 B/D) (A) (B) (A) -(B) (B) - (C) (C) Algeria 1,100 960 140 270 690 Indonesia 1,180 1,120 60-10 1,130 Iran 3,900 3,480 420 290 3,190 Iraq 2,800 2,390 410 Kuwait 2,150 1,870 280 130 1,740 Libya 1,450 1,340 110 180 1,160 Nigeria 2,200 1,990 210 200 1,790 Qatar 750 700 50 140 560 Saudi Arabia 9,500 7,970 1,530 920 7,050 UAE 2,500 2,010 490 120 1,890 Venezuela 2,750 2,660 90 160 2,500 Total 30,280 26,490 3,790 2,400 21,700 OPEC (excluding Iraq) 27,480 24,100 3,380 21,700 (Source) Prepared by IEEJ from IEA, Oil Market Report. 22
Crude Oil Price Trends by Scenario 45 $/bbl Conflict Spillover Scenario Stalemate Scenario Stabilization Scenario 35 Actual records 25 15 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2002 (Source) Prepared by IEEJ. 2003 23
What Will Crude Oil Price Be From Now On? Instability factors, notably Iraq and Venezuela problems, surface as the driver of the international market for the present and the near future. Production trends of OPEC-10 form the key element in supply and demand from now on. From 2Q/2003 onward, the fundamentals may soften. However, it is market psychology that actually drives the market. Moreover, the strong likelihood is that geopolitical (unstable) factors can drive psychology. Depending on the future developments of the Iraqi situation, market/price scenarios give quite different pictures (ranging from around $20 to over $30 in the second half of 2003). Crude oil prices likely unstable by interaction of the market psychology, fundamentals and Iraq situation, etc., continuing high volatility appears inevitable. 24