Oil market likely to remain volatile, says IEA

12 February 2003
World oil supply is still stretched despite the restoration of Venezuelan production, and price volatility is likely to continue, according to the February Oil Market Report of the Paris-based International Energy Agency (IEA). 'The global oil supply and distribution system has been stretched such that it has less margin for error,' the IEA warned. The agency said that following the strike, it would be some time before spare capacity and stocks were rebuilt. Venezuelan production had recovered to 1.4 million barrels a day (b/d) by early February, compared with 3.4 million before the strike which drove output down to 800,000 b/d in December (MEED 17:1:03). 'Markedly higher production [by Venezuela] will be difficult to achieve and take longer,' the IEA predicted. The continued low production by Caracas and stronger-than-expected winter fuel demand is stretching supplies at present, but the continued rise in Venezuelan output compounded by shrinking demand in the second quarter could require rapid and credible OPEC production cuts to prevent a price slump, said the report. 'The issues then become how easily OPEC reductions are apportioned, how quickly cuts are made and whether compliance with lower targets is observed.'

On the other hand, if war breaks out in Iraq while Venezuelan production is still low, supply would be severely stretched, to the limit of even what Saudi Arabia could add to output. The IEA estimated spare capacity at 2.3 million b/d, just under the 2.5 million b/d Iraq is currently pumping. Global oil output in January rose 1.2 million b/d to 77.6 million b/d, with the extra output coming chiefly from Saudi Arabia, Iraq, the UAE and Nigeria. A cold winter in the northern hemisphere and a recovery in the aviation industry increased demand, although a sluggish global economy prevented it from reaching historic highs. Demand forecast for whole of the first quarter is forecast at 78.2 million b/d while demand growth for the year as a whole is estimated at 1.1 million b/d. 'Inland deliveries of oil products posted their steepest gains of the year in December rising by an aggregate 3.6 per cent from 2001,' the IEA reported. Average oil prices in January were $32.99 for WTI, $31.32 for dated Brent and $28.02 for Dubai. Refining margins improved as product prices rose faster than those of crude.

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