OPEC Replaces Lost Iraqi Output In April

<a href=www.menafn.com>MENAFN Middle East Economic Survey - 19/05/2003

Total OPEC oil production in April was little changed from March, falling 0.4% or 98,000 b/d to 26.902mn b/d from 27mn b/d in March, MEES estimates show (MEES, 21 April). OPEC-10 (OPEC without Iraq) production, however, was up by 3% or 782,000 b/d from 25.97mn b/d to 26.752mn b/d as Iraqi production shut-in during April due to the conflict was mostly replaced by other members of the organization. Aside from Iraq, where production fell to an average of just 150,000 b/d in the month, production from Iran and Indonesia was slightly lower in April while all other member countries, with the exception of UAE whose output was flat month on month, increased output.

The data showed that lost Iraqi production was replaced by increased flows of 450,000 b/d from Venezuela, where production levels continue to increase after the strike, with Saudi Arabia, Kuwait and Libya also each lifting output by 100,000 b/d in the month. Venezuela production includes some 380,000 b/d of syncrude. Nigerian output rose 50,000 b/d from March's low as shut-in production capacity was brought back on-stream after civil disturbances in the country eased. Algeria also lifted output by 50,000 b/d, reflecting the gradual increase in upstream and midstream capacity as the Ourhoud development production is ramped up and work on export pipeline expansion nears completion. MEES sources indicate that Iran's output comprised 2.242mn b/d of exports and deliveries of 1.45mn b/d to domestic refineries.

At OPEC's Consultative Meeting on 24 April, the organization agreed to cut production by 2mn b/d effective 1 June, set new quotas for members and thereby raise the ceiling from 24.5mn b/d for the OPEC-10 to 25.4mn b/d (MEES, 28 April). The move was aimed at consolidating prices within the organization's preferred $22-28/B price band and laying the groundwork for a possible return of Iraqi production in the coming weeks.

OPEC Crude Oil Production 2H 2002-April 2003 (MEES Estimates - '000 B/D) Quota 2003 2002 1 Feb Average Apr Mar Feb Jan Dec Nov Oct Sep Aug Jul 2003 2002 Algeria 1,200 1,150 1,150 1,050 1,050 900 1,000 900 870 860 782 883 Indonesia 1,050 1,090 1,050 1,110 1,100 1,120 1,100 1,100 1,120 1,120 1,270 1,117 Iran 3,692 3,730 3,950 3,713 3,750 3,740 3,500 3,700 3,350 3,560 3,597 3,470 Iraq 150 1,030 2,430 2,550 2,270 2,370 2,420 1,820 1,500 1,830 2,014 Kuwait* 2,400 2,300 2,100 1,900 1,820 1,800 1,800 1,920 1,910 1,910 1,966 1,853 Libya 1,500 1,400 1,400 1,350 1,330 1,340 1,330 1,330 1,320 1,320 1,312 1,317 Nigeria 1,850 1,800 2,150 2,150 2,100 2,000 1,980 2,000 1,950 1,900 2,018 1,978 Qatar 760 750 750 720 700 680 670 660 650 630 635 640 S Arabia* 9,500 9,400 9,200 8,400 8,000 7,800 7,850 7,700 7,600 7,550 7,963 7,551 UAE 2,250 2,250 2,200 2,100 2,000 1,970 2,000 1,960 1,990 1,970 2,138 1,952 Venezuela 2,550 2,100 1,500 620 1,000 2,970 3,200 3,100 3,000 2,700 2,819 2,635 Total 26,902 27,000 27,880 25,663 25,120 26,690 26,850 26,190 25,260 25,350 25,409 OPEC 10** 26,752 25,970 25,450 23,113 22,850 24,320 24,430 24,370 23,760 23,520 24,500 23,394

• Includes 50% share of Neutral Zone output, which averaged 600,000 b/d in April, steady with 1Q. Neutral Zone output averaged 597,500 b/d in 2002. ** Excludes Iraq.

Demand Recovery Imminent, Says Hetco Markets always appear weakest when they are about to turn, and the market's turning point should be about now, according to Edward Morse of Hess Energy Trading Company (Hetco). In the report May: It's Another Turning Point, published on 12 May, he says: "From now on, global product demand will be on a relentless seasonal increase that should continue through August. On average, OECD product demand grows by 1.7mn b/d between May and mid-summer, with the rest of the world kicking in another 500,000-600,000 b/d. Similarly, OECD refinery demand for crude also increases seasonally from May to August by an average of 1.7mn b/d, with the rest of the world adding another significant increment as well." Seasonal demand projections are central to the report's optimistic viewpoint: "2Q demand is invariably lower than 3Q demand, given the impact of summer driving in the northern hemisphere and of increased demand for oil in power generation to fuel air conditioning. On average 3Q demand rises by 1mn b/d over 2Q demand in the OECD. More striking, however, is the rise in demand between the low point in May and its peak in July/August. Since 1990, the average increase between May and mid-summer has been 1.735mn b/d in the OECD. There have been two years when the increase was significantly lower (1991 and 1995). But there have also been years when the increase has been significantly higher. In most of the 13 years between 1990 and 2002, the increase in OECD demand between May and mid-summer has hovered around or exceeded 2mn b/d. Our own projections foresee a demand increase in the OECD of 1.9mn b/d between May and mid-summer, about at the median of demand increases over the past 13 years." The report says that there are currently plenty of bears among market analysts, who point to 2Q as the low demand season, supported by indications that global demand was 1.8-2.0mn b/d lower in April than March, and that May is expected to be even lower: "Added to this sentiment are concerns about the impact of SARS on the Asian demand growth engine and generalized weakness in the global economy. They also point to OPEC's continuing overproduction along with expectations that Iraq could be back in the market quickly and robustly. But OPEC watchers should know better than to read ministers lips, in a world in which actions speak louder than words. OPEC appears to be taking an appropriate amount of oil out of flows in May and June. Iraq aside, the OPEC 10 appear ready to produce about 26.3mn b/d in May, or 440,000 b/d under April levels. They also appear ready to reduce flows by another 300,000 b/d in June, reining in output to about 26.0mn b/d, a mere 600,000 b/d above the quotas set for June (25.4mn b/d)." Mr Morse expects a "reasonable" build in stocks during 2Q, in the region of 1.6mn b/d: "That's just under the historical average for 2Q and will at best barely replenish global stocks toward the normal range by the beginning of 3Q." The real question mark over the market is not OPEC, the report says, but Asia: "It relates to Asian demand, real and apparent, and whether it will decline because of SARS and a cautionary, huge stock build in Asia over the past half-year." The report adds: "On the supply side there looms a very large unknown: extra stocks bought and hoarded in Asia from August 2002 through April 2003, to deal with a potential supply disruption from Iraq. Will the estimated 100mn barrels of extra stock build come back onto the market? If so, when?" On the demand side the report says that the largest estimates of the impact of SARS saw a demand reduction of 300,000 b/d for two quarters: "That is probably not enough to have a tangible impact on inventory levels, oil trade or prices, because there are two countervailing factors at work. These countervailing pressures include Japan's continuing problems with getting Tepco's nuclear reactors re-started and running. Current estimates focus on 200,000-300,000 b/d of incremental fuel demand for running thermal plants to replace nuclear energy through 3Q. They also include fuel switching in the US, which is resulting in at least 200,000 b/d of oil substitution for natural gas through 3Q as well. This depends on natural gas prices remaining higher than product prices on a BTU-equivalent basis, which now seems highly likely."