Report suggests end of $16 barrel may be in sight

Wood Mackenzie is offering a more sanguine view of the likely level of oil price through 1998. First Break explains why. Everyone is being too pessimistic about the price of oil for this year, according to energy analyst Wood Mackenzie. It forecasts that a recovery will push the price of Brent crude oil up from its current depressed level of below $16 per barrel to around $19. Wood Mackenzie believes that current market price expectations overstate the weakness in the fundamentals of global oil supply/demand balance for 1998. Among other things, it argues that the demand weakness expected as a result of the Far East financial crisis and increased OPEC oil output will be less significant than anticipated for world oil markets. For much of 1997 there was little to suggest that the oil price fundamentalswere any less strong than in 1996. Brent crude oil averaged $19.31 per barrel last year following an average of $20.82 per barrel in 1996. Global oil demand growth was buoyant for most of last year even allowing for the slowdown in the Far East economics. Oil stocks had fallen to record lows in 1996 and remained that way in early 1997. Planned increased in non-OPEC oil supplies fell short of expectations in provinces such as the West of Shetland. It was also found that the partial return of Iraq oil exports did not depress prices in 1997, nor did the extra 2 million b/d from OPEC members over and above the 25 million b/d quota set in 1993. The rapid change in sentiment at the end of 1997 resulted from a combination of factors - escalating fears about the Far East economies, OPECís decision to raise its production quotas from 25 to 27.5 million b/d, the Iraq factor and the mildness of the winter weather in the northern hemisphere. Wood Mackenzie says that the perception of a considerable surplus of supply over demand may be misplaced and that there is potential for oil price recovery later in the year. One reason is that for most of the 1990s there was a tendency to underestimate the flow of oil from non-OPEC resources due to new techniques such as 3D seismic and horizontal drilling plus the industry focus on cost reductions and more favourable regulatory and taxation regimes.