Oil tankers in transit complicate the supply/demand balance.
Turning oil market
First, the good news: Supply cutbacks of around 770,000 b/d are reflected in the latest IEA Monthly Oil Market Report (April-June numbers). Now, the bad news: Supply is still running ahead of demand by 1.45 million b/d. Obviously, more production constraint is needed before balance can occur. The International Energy Agency lists three balance- restoring factors:
- Excess daily flows must cease
- Oil in transit must be absorbed
- Inventories must be run down.
Oil in transit will complicate the matter and extend the time for balancing forces to have a full effect. "Global demand (1998) is now projected to increase by 1.1 million b/d or 1.5%, significantly below incremental demand of 2.1 million b/d in 1997," states the report.
The Iraqi wildcard
Iraq can go either way (global supply surplus or shortage), depending on the sanctions issue. It currently enjoys production flows of close to 2 million b/d. Supply-enhancing equipment will come online in the fourth quarter and could raise Iraqi output over the first half of 1999.
The current sanction limit is US$5.26 billion in sales, over twice the former limit of $2 billion. There are no production limits on Iraq, only sanction revenue limits. Iraq continues to press for complete lifting of all sanctions. If the strategy backfires, Iraq could be cut off from world markets again, tightening supply. If it succeeds, Iraq will produce as much as possible, which will prolong the current supply/demand imbalance.
The battered economies of Korea and Indonesia are off 10% and 8.4%, respectively, in oil demand. The SE Asian financial crisis now affects the global economy. The economic collapse took almost a year to work its way through the trading patterns and inventory systems.
Slow local demand for SE Asia goods and the need to generate hard currency has created a buyer's market. Inventories are being sold at reduced rates and in quantity. The shipping lanes are filled with vessels loaded with trade goods, but the flow is mainly out of Asia, not in.
In the US, both port and rail delays are common as the goods move to market. SE Asia's slack demand for OECD countries' goods is slowing the developed economies worldwide. Slowing economies means slower growth in oil demand. It looks like oil prices will be soft well into 1999.
Iran: consumer's oil friend
Iran has made the oil world stronger, more competitive, more efficient, and, to Iran's chagrin, kept prices reasonable. Iran has been a terror from OPEC's viewpoint.
In the 1970s, Iran severely constrained exports, which drove oil prices to $45/bbl.
The pricehawk's action eventually stimulated the opening of new oil provinces, spurred the drive into deeper offshore waters, forced the oil industry to rapidly improve technology, and strengthened non-OPEC competition. Iran continued its policies in the most recent meeting, where its position nearly collapsed the agreement. This pattern is bad for the OPEC cartel, but great for the consumer.
How does one characterize theft on the high seas? The process of stealing goods, interfering with legal transaction of business, or endangering the safety and well-being of crews and equipment on the high seas is normally considered - well - a form of piracy.
In early July, Greenpeace began its 1998 campaign by obstructing the Geco Diamond. The seismic vessel was working for Statoil, Mobil, and Enterprise in Quadrant 219 of the Atlantic Frontier. It was gathering seismic data to support the legal exploration efforts of these companies.
By forcing the vessel to veer off course, Greenpeace stole seismic data from the affected companies. The group directly interfered with legal commerce on the high seas, and placed the safety of the vessel's crew and equipment at risk. In addition it also forced additional expenses on the companies involved, another form of theft.
The nature of 3D seismic acquisition requires very long streamers, very long tow paths, and very long clear paths before of the vessel. Like an oil tanker, a seismic vessel cannot stop quickly. It can veer to avoid an obstacle, but at great risk to its outboard equipment. Tangled and torn streamers, bent or broken streamer spreaders, as well as damaged positioning networks are some of the potential problems.
Greenpeace justifies its actions based on the righteousness of its cause. At the least, it is reckless endangerment; at the worst, a form of piracy - all because the group is unable to impact the judicial or legislative process of licensing through legitimate means.
Short cycle thought
Around the developed world, there is an illness driven by righteous intolerance and a certain political expediency. It is short-cycle thought and short-cycle solutions with respect to the earth and general well-being. Environmental groups seem to be focusing on hydrocarbons, and the companies that both find and distribute them, as some demonic force.
Hydrocarbons are the stored energy of the Sun, are a natural product of the earth, are found in large quantity, and bring a dramatic improvement in the world's economic well-being. Groups such as Greenpeace are pushing against over five billion people, which all want the benefits that petroleum offers.
Copyright 1998 Oil & Gas Journal. All Rights Reserved.