IEA Secretariat 21 March, 2003
Oil prices eased this week as the next steps in the disarmament of Iraq became clear. Financial, equity and commodity markets have all reacted favourably to this news. Although markets shun risk, they abhor prolonged inaction and uncertainty even more. This price movement was supported by the arrival of Middle East oil in key markets with more on the way. Notwithstanding, prices remain high just under $30 per barrel for the OPEC basket of crudes.
Middle East producers have been active in fixing vessels for March through May loadings. Combined with oil already on the water, this provides reassurance that they continue efforts to increase production to meet any potential loss of Iraqi supplies. Venezuelan production has also been
rebounding from December-January lows and is currently estimated in excess of 2.0 mb/d. In addition, non-OPEC supply is estimated to grow by 500 kb/d in March. Combined, these factors will help to offset any loss of Iraqi and Kuwaiti supply.
While demand has been unexpectedly strong due to the combined effect of colder than normal weather in the Northern Hemisphere, high natural gas prices that ncouraged fuel switching into oil in the US and a shortfall in Japanese nuclear power generation, some of these pressures are easing. We are rapidly approaching the end of the peak winter heating season with a corresponding drop in seasonal end-user demand. This reduction in demand is expected to be 1.6 mb/d from the first to second quarters.
Given the amount of oil that is on the water, the seasonal decline in demand and the firm commitments of producers to increase production, we do not believe the market currently requires an immediate release of IEA stocks. This conclusion is subject to the market being convinced that producers can and will fulfill their pledge to meet its needs and that there are no major unforeseen developments. Unforeseen developments could include consumer panic buying and hoarding, damage to oil fields outside Iraq, a further supply disruption out of Venezuela or Nigeria, or a broadening of the scope of the battlefield. Nevertheless we conclude that there is sufficient flexibility left in the system to obviate the need – at this time – for any co-ordinated IEA stock release.
A cautionary note. Markets are particularly volatile and we should be under no illusion – they will react quickly to any new shocks. Industry stocks are very low, infrastructure and transportation are strained even as markets hold a high expectation of a quick resolution to the military intervention. The IEA will need to be vigilant, to monitor the market on an ongoing basis and be ready to respond as required and at short notice.
While this preliminary assessment does not call for any collective action at this time, Members are encouraged to make all preparations appropriate to facilitating a rapid response to any new shock to the market. Any such additional shock would be the subject of a separate assessment.