US Stocks Decline Revives Demand OptimismUS Stocks Decline Revives Demand OptimismUS Stocks Decline Revives Demand Optimism

VOL. XLIV

No 32

6 August 2001

US Stocks Decline Revives Demand Optimism

Early last week crude oil prices withered as traders were undecided about how the supply-demand balance would move in the wake of OPEC’s decision to cut supplies by 1mn b/d from 1 September (MEES, 30 July). All eyes were scanning the horizons for evidence of a demand pick-up now that refiners are preparing for winter consumption. Once again, US stocks data provided the hope markets were looking for: not only was there a strong decline in US crude and gasoline stocks the previous week, but also there were further revisions to demand data, leading traders to begin to speculate that the current recession might prove shallower than generally believed.

The American Petroleum Institute (API) published its weekly stocks report after markets closed on 31 July, and the following day both WTI and Brent crude prices did a U-turn and surged upwards as hedge funds adjusted their positions (see table below). The API report said that in the previous week crude oil stocks fell by 3.5mn barrels, when traders had been expecting a stockbuild of 1.3mn barrels. While this was viewed as bullish for crude prices following OPEC’s production agreement, the crude build was readily explained as the delayed effect of Iraq’s suspension of crude oil loadings throughout June – tankers take about six weeks to travel from Iraq to the Gulf coast.

More significantly, the API reported that gasoline stocks declined by 2.95mn barrels, and that demand stood at a healthy 9.16mn b/d, although gasoline stocks were still 1.4% above the 10-year average. Demand for the previous four weeks was reported to be up 2.8% over the same period last year, while year-to-date consumption was 0.9% higher than last year. This demand strength was unexpected, given the widespread news about the US economic slowdown, and suggests that the recent fall in retail gasoline prices has encouraged US drivers back onto the roads. Another factor was refiners’ reduction of gasoline yields to maximize middle distillate production. The API reported a 1.48mn barrels increase in distillate stocks.

In the Weekly Oil Data report of 1 August, JP Morgan analyst Paul Horsnell said that the US gasoline market continues to be a roller-coaster, and that the surplus of the previous few months has vanished – the market is beginning to look tight again. He was also upbeat about demand, based on continuing recalculations of demand data: “In the bustle of the market reaction to the weekly figures, the later revisions to demand are normally overlooked. The latest revision by the US Department of Energy has added 314,000 b/d to May demand. This follows the 574,000 b/d upwards revision to April demand, and the 419,000 b/d upwards revision to March demand. Demand has not collapsed, it is very strong and there does seem to be a disconnection between market psychology and the actual numbers.”

This optimism was reflected during trading on 2 August, which saw the two main benchmark crude blends bounce back by about $1/B. This was attributed to hedge funds rushing to balance their books, having taken a strong short position in recent weeks in the belief that demand would continue to weaken and crude prices would follow. The price hike appeared to mark an end to a move by NYMEX speculators to build a strong short position in order to drag crude oil prices downwards, which was a key factor in OPEC’s decision to reduce output so sharply (MEES, 23 July).

Meanwhile, OPEC reassured the markets that it was on standby to satisfy any demands for increased supply volumes. OPEC President Chakib Khelil, Algeria’s Energy Minister, told reporters on 31 July that the organization was prepared to increase oil production if the US economy showed signs of a recovery. Mr Khelil said, “with this confidence perhaps the economy can restart growth at the end of this year. In this case, I think OPEC will have to increase production to meet this demand.” He added, “what we are looking for is the stabilization of prices: if it’s $24/B, $23/B or $22/B that’s fine by us, as long as it’s stable.” OPEC Secretary-General Ali Rodriguez said on 30 July that the organization would take “whatever measure is necessary” to maintain stable oil prices at its scheduled ministerial meeting on 26 September.

Earlier the oil ministers of Saudi Arabia, Venezuela and Mexico met in Geneva to discuss the supply-demand outlook. The meeting was greeted by markets as something of a curiosity. While Mexico’s output is expected to fall because of technical problems in the Cantarell field (MEES, 30 July) and Saudi Arabia is the main driver of OPEC’s price stabilization policy, it appeared to be Venezuela’s initiative to debate how to convince non-OPEC producers to trim their own output. The meeting’s official press communiqué (see below) was seen as something of a non-event after the fireworks of the full OPEC agreement. Venezuela’s Oil Minister Alviro Silva told Dow Jones on 30 July of his hope to persuade Norway, Russia, Angola, Oman and Kazakhstan to copy the OPEC cutbacks move, but this was judged to be a political position for a domestic and US audience rather than a viable proposition.

Settlement Prices For Benchmark Crudes ($/B)

Date	September WTI	September Brent	OPEC Basket
27 July	27.02	25.19	23.87
30 July	26.63	24.96	23.63
31 July	26.35	24.69	23.48
1 August	26.77	24.96	23.49
2 August	27.71	26.13	24.42

Joint Communiqué of the Secretary of Energy of Mexico, the Minister of Oil and Mineral Resources of Saudi Arabia and the Minister of Energy and Mines of Venezuela

Geneva, Switzerland, 29 July 2001

Continuing with their periodic consultations, the Secretary of Energy of Mexico, Ernesto Martens, the Minister of Oil and Mineral Resources of Saudi Arabia, Ali al-Naimi, and the Minister of Energy and Mines of Venezuela, Alviro

Silva, met in Geneva, Switzerland, to analyze the evolution of the international oil market.

The Ministers agreed that the recent decision taken by OPEC to stabilize the international oil market was timely, given the slowdown of the world economy and its effect on market fundamentals. Over the past few months, demand has continued to fall while supply has been rising as a result of stocks build-up beyond expectations, the resumption of Iraqi exports and the increase in non-OPEC production. Thus, the market has shown signs of entering a new cycle of instability, which has warranted this timely action.

The Ministers reiterated the importance of stability as a precondition to ensuring a well-supplied oil market in the short- and long-term. They affirmed their commitment to fair price levels that allow the world economy to resume its growth while permitting investments to further guarantee oil supply in the long run. They recalled that a consensus has been reached within the consumers-producers dialogue that price levels within the established band are acceptable to all.

The Ministers agreed to continue monitoring market fundamentals and adopt any measure needed, in a timely manner, to ensure a stable and adequately supplied oil market, for the benefit of both producers and consumers. Moreover, they made an appeal to major oil producers to continue to cooperate in the effort to maintain the stability of the market. The Ministers underscored the importance of enhancing the consumer-producer dialogue, in order to ensure understanding and promote transparency and market stability.

The Ministers expressed their appreciation to the permanent Mission of Mexico to the International Organizations in Geneva for hosting the meeting.