High stocks weaken prices

November 24, 1998, 08:00 CET

Possible production cuts which can reduce crude oil stocks is the key issue ahead of Wednesday's Opec meeting in Vienna.

Stock reports inspire the biggest market reactions, say analysts in Oil Trading & Supply. High world oil stocks are a major reason why crude prices remain low.

The USA reports stocks weekly, and Europe on a monthly basis. But only part of the world - largely the OECD countries - issue such figures.
So far this year, reported stocks account for only half the calculated increase in oil holdings. So large unreported reserves are being held.
The amount of crude stockpiled during 1998 is put at about 180 million barrels, corresponding roughly to the annual output of Statoil's Gullfaks field in the North Sea.
These holdings will be consumed sooner or later, much of them in Europe and the USA. They first appear in the regular statistics when imported.
Such imports overshadow the calculated draw-down of stocks for the fourth quarter, so reported stocks are most likely to increase and exert continued pressure on prices.
The Organisation of Petroleum Exporting Countries raised its self-imposed production ceiling in the autumn of 1997, more or less at the same time as the Asian economic crisis was escalating.
Combined with a mild winter, this prompted a substantial build-up in stocks for the first half of 1998 and a consequent sharp fall in crude prices.
As a result, Opec made substantial production cuts during the summer to create a virtual balance between supply and demand in the third quarter.
Increased winter demand usually causes reserves to decline substantially. But a normally cold winter this year and persistently low Asian demand mean that stocks will continue to grow in 1999, according to Statoil's analysts.
However, this increase is likely to be much smaller than in the present year because of Opec's production cuts. With existing stocks already high, prices will probably remain low through 1999.
Any price rise depends on changes to the balance between supply and demand. A very cold winter in the USA and Europe could have a positive effect, for instance, or a possible rapid recovery in Asian economies.
Opec's regular meeting this week provides a formal opportunity to announce reductions. The market is waiting to see whether the organisation simply urges its members to tighten discipline and sticks to the existing output ceiling, or whether it lowers the latter even further.
A possible additional reduction in Opec production must total about one million barrels per day to prompt any draw-down in stocks during 1999.