OPEC sees surplus of 1-mil b/d at current production rates

OPEC sees surplus of 1-mil b/d at current production rates

Dubai (Platts)--28Dec2004


OPEC sees a surplus of 1-mil b/d in the fourth quarter of 2004 at a current
level of production, which the group estimated in its latest Monthly Oil
Market Report at 29.76-mil b/d for November. "For the fourth quarter of 2004,
the current level of OPEC production and the estimated level of demand imply a
surplus to the balance of around 1-mil b/d, which would result in a
contra-seasonal stock build to high levels well above the five-year average,
as has begun to be reflected in recent OECD data," OPEC said in its December
bulletin. "At the same time, the perceived risk premium in the oil price has
eased following accelerated production capacity expansion in OPEC member
countries. Combined, these developments have helped crude prices to reflect a
convergence towards market fundamentals," it added. Oil prices began to ease
Monday, the first trading day after the Christmas holidays, on warmer than
expected weather in the US northeast and a rise in heating oil inventories.

The OPEC production figure of 29.76-mil b/d, which is based on estimates by
secondary sources, is some 2.76-mil b/d above the group's formal ceiling of
27-mil b/d in effect from Nov 1. The 10 OPEC members bound by quotas raised
actual production to try to bring down record high oil prices achieved in
October. "The record high OPEC output levels were part of a deliberate effort
by member countries to boost supply to ease exceptionally high prices that
have been well above the level justified by fundamentals," the bulletin said.
"As a consequence of these actions, crude oil prices receded from record
highs, with the OPEC reference basket plunging almost $13/bbl, from $46.61/bbl
on 21 October to below $34/bbl, with prices on 8 December at $33.78/bbl." OPEC
ministers met in Cairo Dec 10 and agreed to trim overproduction by 1-mil b/d
from Jan 1 to prevent a contraseasonal build in inventories in the first
quarter of the year. They will review their output policy again in Vienna Jan
30.

"Mild weather across the globe and contra-seasonal distillate stock builds
over the last two weeks eased earlier concern about a possible shortage of
heating oil in the winter," the report said. "This situation has triggered a
bearish sentiment since early December, which is still weighing on the market.
Despite these developments and a dramatic drop in prices for all products, the
middle of the barrel remained the major market driver, and a cold spell may
recuperate part of the recent losses in heating oil prices." US benchmark WTI
futures fell below $44/bbl Monday, shedding $3/bbl in thin post-holiday trade.
It recovered slightly Tuesday and was trading up 33 cents at $41.65/bbl at
1137 GMT. On the demand outlook for next year, the OPEC report said lower
economic growth in 2005 was expected to lead to an easing of incremental
demand for oil from high rates seen in 2004. "The latest projections for 2004
indicate that total world oil demand will grow by 3.2% for a year-on-year gain
of 2.5-mil b/d, a level of demand growth not seen since 1977," it said.

"In 2004, 85% of the increase in world oil demand came from North America,
China and developing countries. Given that the economies of these regions are
expected to see lower growth rates, the demand for 2005 is expected to slow to
a still respectable increase of 1.5-mil b/d. While below the level of 2004,
this figure is still higher than the average demand growth rates of the last
10 years, the report said." It added: "In absolute terms, world oil demand is
estimated to average 81.77-mil b/d for the year. Average world demand in 2005
is projected at 83.28-mil b/d, implying a gain of 1.51-mil b/d or 1.85-mil b/d
over 2004 consumption." The report also referred to the impact of the weaker
US dollar, which it noted had fallen by 6% in trade-weighted terms since
end-August. "From October to November, the fall in the dollar reduced the real
value of the barrel by 2.8%," it said.

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