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Saturday, October 20, 2018


Synchronised recession - OECD Economic Outlook

OECD forecast growth to "remain very weak" in the first half of next year. However, it was more positive about future prospects. The OECD estimates overall economic growth among its member countries to be 1% this year and next, accelerating in 2003 to a more normal rate of 3%. The US will grow by 1.1% in 2001 and 0.7% in 2002, with Euro-zone growth to slow from 1.6% this year to 1.4% next year. UK growth will ease from 2.3% to 1.7%. Japan's economy is expected to contract by 0.7% in 2001 and by 1% in 2002.

OPEC, Non-OPEC, oil price and tankers

Oil is not just any commodity. It is by far the world's most strategic product traded. The level of the price and supply of oil cannot be fully understood through purely economic considerations as there are also strong political and socio-economic forces at play.

The production costs of oil may vary from $1-2 per barrel to $8-10 for unconventional oil and small marginal fields, up to above $12 for Canada's oil from oil sands and gas to liquids production. Most of the world oil is produced at well below $10 per barrel. However, the income from oil is important to balance the budgets of many large oil producers: the apparently extremely wealthy Saudi Arabia probably needs some $18 per barrel to cover its social expenses and maintain its national infrastructure. Oil contributed to 35% of Russia's foreign trade earnings in 2000, according to IEA. Looking solely at the costs of getting the oil from the ground is insufficient.

If all oil producers were to produce at full capacity today, supply would increase by some 4 mbd and prices would probably plummet to far below $10 per barrel. Speculators would enter the market on a large scale, the oil stocks would be filled to the brim and probably consumption would pick up slightly. The tanker market would boom at the same time as all the oil producers, including the large oil companies, would suffer such as they did in 1998. However, this would be a short-term phenomenon. In the longer term the excessive build-up of stocks would cause the tanker market to plummet, after which stocks would be reduced and oil prices would rise again.

The world would not benefit from oil prices that are too low because it might create political unrest in some high tension areas of the world. Excessive burning of oil would mean higher emissions of carbon dioxide. In the longer term it would also stop the development of alternative energy and marginal oil fields in high cost areas. This would lead to greater dependence on Middle East oil.

High oil prices would definitely not be good for the world either as it would slow down the economy and be expensive for many poor countries that do not have oil themselves.

OPEC production and quotas

OPEC production peaked at 29.5 mbd in October 2000. In October 2001 IEA reported OPEC production to be 27.0 mbd, a decline of 2.5 mbd. Freight rates have closely followed the Middle East production over the last year. Middle East production peaked in November - December 2000 at some 24.8 mbd, when average VLCC freight rates were above $80,000 per day. In October 2001 Middle East production was 20.7 mbd, a decline in oil production of 4.1 mbd, causing VLCC freight rates to plummet almost to USD10,000 per day.

The OPEC quota January 2001 was 26.7 mbd and has since then been reduced three times to the current level of 23.2 mbd. The proposed level for January 2002 is down 1.5 mbd to 21.7 mbd. OPEC's overproduction during this period peaked at 1.3 mbd in September 2001. In October 01 overproduction was 0.9 mbd. The big question is how closely OPEC will follow their agreement to reduce oil production. Any further reduction in Middle East oil production could be dramatic for the VLCC market.

The joker in the pack will be Iraq, which has varied oil production from 0.88 mbd in June this year to 2.85 mbd in October.

The link below gives OPEC production development and quotas as well as a graph showing the development of Middle East oil production and VLCC freight rates.

Web Link:

Non-OPEC competitors:

Russia has been pointed out by OPEC as the main culprit adding more oil to the world. Russia's oil exports have increased strongly over recent years. Exports to Western Europe increased from some 1.9 mbd in 1998 to 2.5 mbd in 2000. Just over half the Russian exports are seaborne and some 70% is exported from Black Sea Ports, the rest from the Baltic.

According to IEA, Russia was the world's largest oil producer in the late 1980s, with production peaking at 11.4 mbd in 1987. That figure declined by over 47% during the next 9 years, reaching a low of 6.0 mbd in 1996. Production stabilised for the remainder of the 1990s yet showed significant growth of 5.7% in 2000 as a result of higher investment and improved technology. Russia's production of 6.5 mbd in 2000 ranks third behind Saudi Arabia and the United States. A major underlying cause for the upturn in oil production, beginning in 1999, was the rebound in international oil prices that occurred after March of that year. Russian industry projections are, however, much higher than those of the government.

An increased oil market share for Russia means fewer tonne-miles transported due to short routes to the Mediterranean and West Europe, but also more shipments for Aframaxes. Large increases in oil export capacity are expected over the 2001-2005 period. An important development that could help reduce export bottlenecks is the Caspian Pipeline Consortium (CPC) initiative. It will have an initial capacity of 0.56 mbd per year from 3rd Q 2001, increasing to 1.34 mbd by 2015.

The Baltic Pipeline project consists of a pipeline extension and a new marine terminal at Primorsk, providing initial export capacity of 0.24 mbd. Plans to boost capacity to 0.6 mbd by 2003 would require a more ambitious construction programme.

Thirdly, an independent export terminal is being built in Sakhalin to accommodate local output of 0.26 mbd by 2005.

Total oil exports from Caspian countries could reach the 2.4 to 3.5 mbd range by the end of the decade; i.e. 0.8 to 1.2 mbd from Azerbaijan, 1.5-2.0 mbd from Kazakhstan and 150 to 250 kb/d from Turkmenistan. The increase this and next year will be less than 0.1 mbd; in the two next years the increases are projected to be 0.2 mbd and in the two years thereafter 0.3 and 0.4 mbd. This will mean that exports are projected to increase from some 0.7 mbd in 2000/01 to 2 mbd in 2006.

The increased export from the Caspian region and the new CPC pipeline tanker traffic through the Bosphoros Strait is expected to increase from 1.64 mbd in 2000 to 1.82 mbd in 2001. This is the maximum tanker traffic the Turkish Straits can handle, according to the Turkish Minister of Maritime Affairs.

The second of the expanding non-OPEC oil producing areas is the North Sea where output is expected to reach its peak early in this decade. It is expected to decline from 6.7 mbd in 1997, to 5.2 mbd in 2010 and 3.5 mbd in 2020. Norwegian supply will probably grow moderately before starting a gradual descent. The UK has fewer prospects for new development. North Sea oil is, of course, also close to the consuming areas and creates relatively little tonne-miles for the tanker industry. Overall North Sea production is expected to decline marginally this year and increase marginally next year.

The third largest non-OPEC exporter is Mexico, which is projected to increase production by some 0.1 mbd both this and next year. Mexican oil mainly goes to the US and provides work for Aframaxes but not that many tonne-miles for the tanker industry.

Altogether the North Sea, Former Soviet Union, and Mexico are projected to add 0.69 mbd to world oil supply in 2001 and another 0.66 mbd in 2002

Great uncertainty

Although the non-OPEC oil projected to enter the market is good for the Aframaxes, reduced demand for Middle East oil is adversely affecting the VLCC market. Considering the large losses low oil prices will cause, it would not be unreasonable to expect non-OPEC producers to contribute to stopping a free fall in oil prices. Indications at the time of writing are that Norway will take the lead among the three largest non-OPEC exporters by curbing production by some 0.15 mbd. There would still be a need for a further cut in Middle East OPEC production.

Link to Russian crude oil exports:
Web link:

Link to world oil supply and demand:
Web link:

Taiwan, China refinery Capacity increasing - EIA Country Report

Chinese Petroleum Corporation (CPC), Taiwan, China's national oil company, is the dominant player in all sectors of the country's petroleum industry, including exploration, refining, storage, transportation, and marketing. However, significant competition began in July 2000 with the opening of a refinery at Mailiao owned by the Formosa Petrochemical Group (FPG), a subsidiary of the private Taiwanese petrochemical firm Formosa Plastics. The first phase of production from FPC's Mailiao refinery began in mid-2000 at 0.15 mbd. The second and third phases are under construction, but operation has been delayed beyond the planned early 2001 start-up dates. The full capacity of 0.25 is still expected to become operational in 2002.

Prior to the construction of the FPC Malilao refinery, Taiwan, China imported a significant quantity of refined petroleum products. Now the country's refining capacity exceeds its domestic consumption of petroleum products, making it a net exporter. The global and Asian economic slowdowns, however, have reduced demand, which has had a negative impact on Taiwanese refiners. The FPC Mailiao refinery has had to cut its production runs sharply in recent months due to declining margins.

IEA World Energy Demand until 2020 - IEA

According to IEA, projected world primary energy demand increases by 57% between 1997 and 2020, or at an average annual rate of 2%. This compares with an annual average growth rate of 2.2% from 1971 to 1997. Oil remains the dominant fuel in the primary energy mix with a share of 40% in 2020, after 1.9% annual growth over the projection period. This is almost identical to its share today. The volume of world oil demand is projected at close to 115 million barrels daily (mbd) in 2020, compared with 75 mbd in 1997.

Inter-Regional oil Trade (which does not include international trade within regions, but which can be very large), is projected to more than double over the next 20 years form. 1,348 million tonnes oil equivalents (Mtoe) in 1999, 2,157 mtoe in 2010 and 2,886 mtoe in 2020. No global "supply crunch" is expected before 2020. The international crude oil price is assumed to remain flat at $21 per barrel in today's money until 2010, but then to rise steadily to $28 through to 2020.

The strongest increase in oil demand is projected to be in China and the rest of Asia, which will increase their share of world oil consumption from 19% in 1997 to 28% in 2020. The US share is projected to be reduced from 27% to 23%, whereas the OECD European share is projected to be reduced from 20% to 15%.

Non-OPEC oil production is expected to grow from 42 mbd in 1997 to 46.9 mbd in 2010. In the second decade, however, production in many key non-OPEC countries will mature, and overall output is expected to level off, reaching 46 mbd in 2020. OECD-area output (excluding Mexico) is projected to fall from 18 mbd in 1997 to 16mbd in 2010 and to 13 mbd in 2020.

N American oil production is expected to decline from 10.6 mbd in 1997 to 9 mbd in 2010.

European oil production is expected to decline from 6.7 mbd in 1997, to 5.2 in 2010, and 3.5 mbd in 2020.

Russian oil production is expected to increase from 6.1 mbd in 1997, to 7.1 in 2010, and 7.9 mbd in 2020.

African oil production is expected to increase from 2.7 mbd in 1997, to 4.8 in 2010, and 4.8 mbd in 2020.

For a full projected development see:
Web Link: