Comment

Crude Crunch

May 1998 Vol. 219 No. 5
Comment

Bob Scott

Crude crunch

It's always hazardous to discuss crude oil prices because of their volatility and eternal confusion over the mishmash of prices that are bandied about. But the decline in world prices since last fall reached a 9-year low in mid-March and merits a few comments, even though we've seen some recovery since then.

Unfortunately, spot prices from the NYMEX that one reads about in the paper are not at all reflective of the price the U.S. producer actually receives at the tank battery. Example: on April 8 when this was written, the NYMEX spot price for WTI May delivery was $15.55. Posted price from one major oil company on April 8 was $13.25. Posted sour crude prices were even lower, $9 to $10.25. Brent the same day was $13.98, In this part of the world, all of this translates into "bad chili."

Cause of the price problem was too much crude oil supply and not enough demand. But we also strongly suspect some panic on the part of crude oil gamblers on the spot markets had much to do with that steep March price decline and the yo-yo trend since.

You've all likely read that causes of the supply-demand imbalance were two successive warmer than usual winters in the Northern Hemisphere attributed to El Niño; the Asian economic crisis; OPEC's increased production; and a perception that Iraq will further compound over-supply if it meets new UN-set crude export quotas.

An offshoot of the Asian "economic flu," was that it shifted large volumes of African sweet oil previously exported to Asia to the Atlantic basin. And that meant mostly to the U.S., where all of a sudden most of the storage space disappeared.

The potential UN-sanctioned Iraqi export increase from $2 billion worth of crude every 180 days to $5.2 billion worth may be in effect by now. But Iraq can't produce enough crude to meet this increased UN allowance for two reasons. First, Iraq's sour crude, which constitutes the bulk of its exports was recently selling for around $10/bbl. That means Iraq would have to export about 2.9 million bpd to achieve the maximum allowed UN monetary rate, while its total export capacity is estimated at around 1.5 million bpd. And second, that export rate can't be increased much because of unrepaired damage to producing, pipeline and export terminal facilities inflicted during the Gulf War and UN sanctions that prevent Iraq from importing materials to fix them. Any significant export increase from Iraq depending on repaired infrastructure thus remains many months away — unless the UN discontinues sanctions to allow immediate equipment imports to repair that damage.

Another price impact last March was U.S. refinery shutdowns for maintenance the first quarter, which abruptly cut refinery runs and added to crude stock buildups. These shutdowns should be completed by now. And planned re-opening of a large Louisiana refinery that will initially require 100,000 bpd of new crude feed stock will also help. However, on the darker side, the International Energy Agency reports that European refineries scheduled for maintenance shutdowns this month could reduce demand by 1.1 million bpd.

The situation has not yet caused widespread panic among operators, but there's surely concern. Some U.S. stripper production has been shut in and more probably will be until prices rise a bit and stabilize. Several companies have reduced budgets. Others have deferred drilling until later this year or curtailed exploratory drilling and oil well workovers or are bypassing oil prospects for gas. As a result, we have also seen reductions in onshore rig rates. Major offshore projects, however, are not at risk as yet, which was illustrated by the March 18 bid total for tracts in the Central Gulf, the 3rd highest ever.

A plus factor has been relatively stable natural gas prices which were higher in 1997 than the year before and have held up very well so far in 1998.

If any quick crude price relief is coming, it will be because OPEC and participating non-OPEC countries make good on their vow to reduce production. Although previous such proposals have never succeeded, this time almost all of OPEC, plus many non-OPEC producers, are feeling the financial bind of lower prices. And those who can't increase their current production rate to make up in volume what they've lost in price are approaching a crisis point. Chances thus may be better than in the past that some positive results will be in the offing.

And finally, having been burned more than a few times, if you think a prediction is forthcoming as to when those prices will start up again, look no further. This is all there is.

Billy Jeff Clinton was in Houston on April 14 for a so-called Town Hall meeting sponsored by ESPN, a sports TV network. Now, if you think a Town Hall meeting implies anybody can come, participate and ask questions, think again.

Tickets are being sent by ESPN (at the behest of the White House so we won't think they're packing the audience, which they are) only to Democrat House members who will dole them out to their constituents, to so-called "community groups", 12 schools and the White House. House members have to send names of those they invite to ESPN so they can be "interviewed," no doubt to determine political correctness and the insipid questions these people will ask.

Of the 12 schools, only four had asked for any tickets as of April 8. Reckon the schools are leery about parental reaction to exposing, pardon the phrase, the kids to the "Chief" participant?

FROM THE ARCHIVE