# Presentation: 903375

## Crude Oil Market Outlook

- Briefing for the
**State Heating Oil and Propane Program Conference**
**Wrightsville Beach, NC**

- by Douglas MacIntyre
**Petroleum Division,** **Energy Information Administration**
- August 21, 2000

## Monthly World Oil Prices, 1976 - 2000

**Monthly World Oil Prices, 1976 - 2000**

**Sources: EIA, Short-Term Energy Outlook database, August 2000.**

**Notes:**
This graph shows the world oil price depicted as the average price refiners pay for imported oil.  Since US refiners buy crude oil from so many different countries, it is an excellent proxy for a “world oil price”.  It is similar to the OPEC basket price.

In real terms, prices are above the recent historical norm, but they are much higher than experienced just a year or two ago.

It’s the comparison to 1998-1999 that people focus on.

And of course, people don’t pay with “inflation adjusted dollars”.  In nominal terms, prices have been higher only a few other times in history.

So let’s look at recent history in nominal dollars ...

## Short-Term Forecast for the World Oil Price

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, August 2000.**

**Short-Term Forecast for the World Oil Price**

**Notes:**
For clarity’s sake, let me say that the most traded crude oil in the world, West Texas Intermediate, is usually about $2 per barrel higher than the “world oil price” used in this presentation.

From the  low-to-mid $20s in early 1997, crude oil prices fell dramatically in 1997 & 1998, leading to a nearly unprecedented event, OPEC cohesion.  Prices became so low that OPEC could finally agree and act.  Following the 3rd of 3 cuts in production quotas, prices rose dramatically to where we see them today.

So where do we see crude oil prices going from here?

## Short-Term Forecast for the World Oil Price

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, August 2000.**

**Short-Term Forecast for the World Oil Price**

**Notes:**
Our forecast has prices declining, but still at close to the early 1997 prices by the end of 2001.  This is based on relatively low demand growth caused by higher oil prices, and increased oil supply.

Our recent oil price forecasts may have been off in timing and severity, but we did forecast $25 oil prices sometime in 2000 back last August.  We just thought it would take longer and not shoot right past $25 and reach $30+.

So, take our forecast as more descriptive than exact ...

## How Did We Get To This Point?

**1996**
**Oil Prices in the Low to Mid-$20s and Low Inventories**** **
**1997-1998**
**Historically Low Oil Prices Caused by:**
**Increased Production from Iraq**
**Asian Economic Crisis**
**Warmer-than-normal Winters**
**Increased Oil Supply from non-Iraqi Sources**** **
**1999-2000**
**OPEC Production Cuts Lead to Low Inventories**
**Oil Prices Reach $30 Level**

**Notes:**
Following the recovery after the Gulf War, prices hit $20+ in 1996 and the talk was of “Just-In-Time” inventories.

Then came the price collapse in 1998 based on events that took place in 1997/98.

1999 became the year of oil price recovery as the 3rd cut in OPEC production quotas made prices reach $30+.

## Iraq Oil Exports Resume in Earnest in 1997

**Sources: EIA, International Petroleum Monthly database.**

**Iraq Oil Exports Resume in Earnest in 1997**

**Notes:**
A major reason for the price collapse was the re-emergence of Iraqi oil exports.  On Dec. 9, 1996, UNSC approves Resolution 986 authorizing Iraqi oil exports.

Then on Feb. 20, 1998, UNSC more than doubles the amount of oil revenues Iraq can collect on the “oil-for-food” plan.

On Oct. 4, 1999, the revenue cap was raised again on a 1-time basis.  However, now there is essentially no revenue cap; but all money is still collected by the UN and is used to buy goods which are then distributed within Iraq.

## Asian Oil Demand Growth, 1991-2000

**Asian Oil Demand Growth, 1991-2000**

**Sources: EIA, Short-Term Energy Outlook, August 2000.**

**Notes:**
At the same time Iraqi oil exports were resuming and even increasing rapidly, Asian oil demand, the main region of growth in the early 1990s, was facing a severe economic crisis.  (Asia in this context includes China, Japan, and the rest of Asia.)  After averaging more than 0.8 million barrels of oil demand growth each year in the early 1990s, Asian oil demand growth was reduced in 1997 and collapsed in 1998, actually showing a decline of nearly 0.4 million barrels per day.   This is actually like having 1.2 million barrels per day less demand than might have been expected (over 400 million barrels in 1998).

But Asian oil demand growth is slowing increasing again.

## Warmer-Than-Normal Winters Built Inventories

**Warmer-Than-Normal Winters Built Inventories**

**Notes:**
Red shaded areas are when demand exceeds supply and draws from inventories are needed.  When the red line is below the green shaded area, supply is greater than demand and inventories are built.  The 3 red areas on the left show a typical winter pattern.  

However, compare it to the winters of ‘96-’97, ‘97-’98, and to a lesser extent, ‘98-’99.  The increased production from Iraq and elsewhere, decreased demand from Asia, and warmer-than-normal winters in those years, all combined to put more oil supply out than was demanded in a period when the reverse is usually true.  This scenario puts downward pressure on prices.

## OPEC (ex. Iraq) Changes Quotas to Impact Prices

**OPEC (ex. Iraq) Changes Quotas to Impact Prices**

**Sources: EIA, Short-Term Energy Outlook database, August 2000.**

**Notes:**
Oil prices tend to be cyclical, and by early 1998, prices had fallen so much that the OPEC 10 countries (the 11 members of OPEC minus Iraq whose oil exports are under UN sanctions) got together and decided to cut production from estimates of February 1998 levels by 1.25 million barrels per day (MMBD) effective April 1998. When prices did not recover right away, the OPEC 10 countries decided to cut quotas (not necessarily production) by an additional 1.35 MMBD effective July 1998.  

Following a few months of that, prices started increasing, but not fast enough for OPEC, so the OPEC 10 countries initiated a 3rd round of production quota cuts effective April 1999.  Total targeted cuts in production from February 1998 levels amounted to over 4.3 MMBD.  With peak OPEC compliance rates at 80% or higher, actual production was cut by about 3.5 MMBD.

But in 2000, OPEC agreed to “turn back” the 3rd cut and increased quotas by 1.7 MMBD effective April 2000.  However, OPEC cohesion had started to decline prior to this and they were “overproducing by about 1 MMBD, so production increases were closer to just a little under 1 MMBD as opposed to the target increase of 1.7 MMBD.

After initially declining to about $25 per barrel on a monthly basis (about $27 per barrel for West Texas Intermediate) in April, prices shot back up again, so OPEC decided to increase production quotas by another 0.7 MMBD.  However, with decreased investment in some countries and increased production in others, much of OPEC is now producing very close to capacity.  Only Saudi Arabia, Kuwait, and the United Arab Emirates have a significant amount of spare production capacity, so any further increases will disproportionately favor these countries. Thus, OPEC cohesion may become a problem for OPEC again. 

## Total OECD Inventory Levels, 1996-2000

**Total OECD Inventory Levels, 1996-2000**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, August 2000.**

**Notes:**
OECD oil inventories are expected to be above average 1990-95 levels by the end of the year for the first time since November 1999.  For most of 2000, OECD inventories are expected to closely follow 1996 levels, when prices were above $20 per barrel.

Of course, this doesn’t account for the increase in demand over the last few years, so when this is taken into account ...

## Days of Supply from OECD Inventories, 1995-2000

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, August 2000.**

**Days of Supply from OECD Oil Inventories**

**Days of Supply from OECD Inventories, 1995-2000**

**Notes:**
... OECD inventories are expected to remain at very low levels when looked at a days supply basis.  (Days supply is the number of days of future demand that can be covered by inventories.) Thus, with inventories likely to provide several days less coverage than in the 4th quarter of 1996, for example, prices are expected to remain relatively high in comparison to historical averages.

## Monthly US Crude Oil Inventories, 1976 - 2000

**Sources: EIA, Oil and Gas Information Resource System (OGIRS) database.**

**Monthly US Crude Oil Inventories, 1976 - 2000**

**Notes:**
Preliminary data indicate that at the end of July, U.S. crude oil inventories dropped to the lowest level at that time of year since 1976.  The latest fall in inventories has called attention to where the increased OPEC oil is going (the last 2 increases in quotas shown earlier).  With crude oil inventories this low, there is little room for flexibility in the refining system.

Additionally, the quality of crude oil may become increasingly important as the product slate, not only in the US, but worldwide, changes.  Both the U.S. and Europe are going to “cleaner” gasoline and diesel fuels, while gasoline may take a larger share of the developing world’s product slate as they improve their transportation infrastructure.

## Conclusions

**Low U.S. Crude Oil Inventory Levels**** **
**Low OECD Days Supply**
**Increased Risk for Volatility**** **
**OPEC?**
**Production Levels?**
**Price Band?**
**Cohesion?**

**Notes:**
So to summarize:
 In the US specifically, on August 18, crude oil inventories were currently at very low levels (more than 11% below last year’s levels).
 In terms of Days Supply of Forward Demand, OECD oil inventories are also very low.
 With low inventories there is an increased risk of price volatility, as was seen in the distillate market last winter, and more recently, the gasoline market this summer.
 So the question comes back to what will OPEC do?
 Will they increase production quotas?
 Will they adhere to this $22-$28 price band?
 Will OPEC cohesion crumble with increased production?
 Time will tell ...

## douglas.macintyre@eia.doe.gov(202) 586-1831