kenimpzoom
Rear Admiral
- Joined
- Jul 13, 2002
- Messages
- 4,807
I work in the oil field, this is bad news, less wells will be drilled in the future, based on this news. Good news for others.<br /><br />Ken<br /><br /><br /> Oil Market Glutted With Crude, Presenting Challenge for OPEC <br /> FWN Select Monday, November 15, 2004 <br /> <br /> <br /> <br />Oil traders uniformly say physical markets are glutted with crude, which could portend lower prices ahead if producers don't take steps to rein in supply. <br /><br />The looming oversupply was masked for a while by production outages caused by Hurricane Ivan. But with Gulf of Mexico output recovering significantly in recent weeks, heavy production since May by the Organization of Petroleum Exporting Countries appears finally to be catching up with the market. <br /><br />A plethora of crudes are sloshing around the refinery-rich U.S. Gulf Coast where buyers have been put off by high contract prices and end-of-year tax considerations that make it economically advantageous to run down their crude inventories. Refiners' profit margins have also eased over the past month, lowering demand. <br /><br />The surplus is not just of lower-quality heavy and high-sulfur crudes, but also more valued lighter and sweeter grades - and it's growing even as Middle Eastern producers like Saudi Arabia, Kuwait and Iraq offer deep discounts or twist arms to get buyers to take more crude. <br /><br />The glut is putting pressure on OPEC to take the politically unpalatable step of cutting back output at a time when oil prices, while falling, remain very high. <br /><br />"It is too early to take about a bearish market just yet, but we do see the market weakening," said Leo Drollas, chief economist at the Centre for Global Energy Studies. <br /><br />"To say there is too much oil in this market is putting it mildly," said a trader at one of the biggest U.S. refiners. "OPEC needs to cut, but they obviously have internal and external pressures not to do that." <br /><br />Weakening Fundamentals <br /><br />OPEC meets next Dec. 10, in Cairo. Though crude futures on the New York Mercantile Exchange have slumped some 15% from record peaks hit in mid-October, they remain about 50% higher than they were a year ago and government officials from key consuming countries are fretting about the impact on economic growth. <br /><br />While analysts and traders do not expect crude futures to plunge - few market players are willing to sell short when the winter could still turn out to be frigid, boosting demand for heating oil - they do see a continued deterioration of spot crude values. <br /><br />In one sign of the weakening fundamentals, crude oil inventories held by companies in the U.S. have swelled by about 10% in the past seven weeks, according to the U.S. Department of Energy. <br /><br />Analysts suspect OPEC linchpin Saudi Arabia may have to quietly cut production slightly given the tepid reception to its offer of incremental crude supplies. <br /><br />"OPEC does not drive this market, demand does," Drollas said. "So if refiners want less oil, OPEC can make some tweaks without having to announce a formal ceiling cut." <br /><br />State-owned Saudi Arabian Oil Co. (SOI.YY), or Aramco, has had difficulty placing incremental barrels of Arab Medium and Arab Heavy for months. Demand has been relatively sluggish for the heavier, high-sulfur grades that are more costly and cumbersome to refine into desired light-end products like gasoline and heating oil. Now, even Aramco's offers of additional Arab Light cargoes are being turned down, traders said. <br /><br />Faced with weak demand, Saudi Arabia has been pressing companies that buy its oil under long-term contracts to take greater volumes in 2005 - 20% more in one case - traders at those companies said. <br /><br />But they said the kingdom is still asking too high a price, especially as sellers of Iraqi, Kuwaiti and South American crudes are making more attractive offers. <br /><br />"The Saudi pricing is not realistic if they expect us to take more barrels," a trader at a U.S. refiner said. "Aramco is telling us to trust them on the prices, but we cannot commit to more oil 90 days before we know what the prices will be." <br /><br />Last week, Aramco set the discount for U.S.-bound December cargoes of its lowest-quality crude, Arab Heavy, at a record-low $14.10 under benchmark West Texas Intermediate. Even that wide differential, however, doesn't reflect market conditions for similar grades, traders at companies that buy Saudi crude said. <br /><br />Scrounging For Buyers <br /><br />State-owned Kuwait Petroleum Corp. is also taking unusual steps to place barrels, traders said. KPC has been offering spot cargoes of Kuwaiti crude into the U.S. Gulf, atypical for the OPEC producer, which only sells about 185,000 barrels a day to the U.S. under term contracts. Kuwait Petroleum was promising to sell the crude at a lower price than Arab Medium, a Saudi crude comparable in quality to Kuwaiti oil, traders said. <br /><br />Iraq's state marketing arm SOMO has shown considerable flexibility when it comes to pricing, freight and quality considerations. Buyers say the Iraqis have agreed to cover the cost of freight delays and to compensate lifters for the declining quality of key grade Basra Light. <br /><br />"I can get Basra at $11 a barrel (under WTI) delivered, so I would prefer that to locking myself into more Saudi right now," said a trader at a company that has contracts to buy Saudi and Iraqi oil. <br /><br />The market is now turning ugly for the higher-quality sweet crudes as well, traders said. Though differentials for sweet crude got a boost in mid-September, when Hurricane Ivan took as much as 500,000 barrels a day of Gulf of Mexico crude off the market, the tide has turned as that production has come back on line. <br /><br />Making matters worse, a plethora of typically sweet West African grades, unable to find homes in the Far East, is showing up in the U.S. Gulf. Along with the usual Nigerian supplies, grades like Angolan Cabinda, Equatorial Guinea's Topacio and Espoir crude from the Ivory Coast are on offer, which traders said is unusual for this time of year. <br /><br />Though OPEC producers may be having a harder time selling their oil, it is doubtful the producers group will agree formally to cut quotas when it meets in December. <br /><br />"It is still too early to talk about big cuts," CGES' Drollas said. "They will need to cut about 2.5 million barrels a day next year, but not until the third and fourth quarters. For now, they should let the stocks get rebuilt."
