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Crude oil stocks are at long-term lows, with OECD inventories approaching the 2,300 mmbbl range and US inventories well below 640 mmbbl. US motor gasoline as well as distillates inventories are at record lows, just below 200 and 100 mmbl, respectively. Domestic demand, however, continues to grow, with robust mogas demand at around 8.5 million barrels per day trending upwards. A high demand for distillates at 4.2 millon barrels per day is surprising considering the warmer-than-expected winter. DOE data displays continued total inventory outperformance throughout 1999, peaking at withdrawals of 51.8 million barrels in 4Q99. Opec compliance has remained high. Low crack spreads indicate refinery discipline. Simmons forecasts an increase of OPEC crude production at or around 1.0 mmbl/d after the March 27 meeting, as well as another hike of 1.5 mmbl/d at their second semi-annual in 3Q00. Their supply and demand forecast for 2000 predicts an average supply shortage of 1.2 mmbl/d, estimating supply and demand at 75.3 and 76.5 mmbl/d respectively. Supply will exceed demand most widely in 1Q00 with 3.6 mmbl/d, while easing to a surplus of 0.3 mmbl/d in 2Q00. Simmons sees 3Q00 undersupply at 1.0 mmbl/d and 4Q00 at 1.2 mmbl/d. The 2001 estimates depict OPEC production remaining stable at 29 mmbl/d, factoring in an additional 0.1 mmbl/d for possible problems with compliance. 2001 is forecast to bring supply and demand back into balance at an average of 77.7 mmbl/d over the year, though indicating cyclical supply shortages in 1Q01 and 3Q01. While 1999 as well as 2000 and 2001 estimates reflect modest demand growth of -0.3%, 1.3% and 1.5%, respectively, high crude prices are being supported by sluggish non-OPEC supply growth of an estimated 0.6% in 2000. Another restricting factor discussed was probable OPEC capacity constraints, with only Saudi Aramco and Kuwait having any notable spare capacity to put online during 2000. OPEC Middle East and Latin American rig count remains very low at just under 200 active drilling rigs, a range that has not been touched since late 1990, supporting the capacity constraint theory. The total OPEC crude output increase of 2.5 mmbl/d is therefore seen as realistic, with not too much leeway on the upside for 2001. US oil directed rig count has not yet rebounded, but is expected to do so throughout 2000, accounting for some of the estimated 2.2% non-OPEC production increase in 2001 (time-to-first-oil is seen as further decreasing). International rig count is also expected to return to 700+ actively drilling. All in all, Simmons is in line with most other analysts, revising their 2000 and 2001 estimates upwards after the Feb 23 GCC and Thursday's ministers' meetings. According to Simmons, the North American natural gas story is "playing out as expected", with an essentially flat gas production around 750 bcf/d, a volatile but steadily increasing gas-directed rig count since 1992 and flat net imports at 9 bcf/d. Winter demand remains essential for gas price stability. 1Q96-99 demand averages 75.4 bcf/d, a 52% increase over 3Q96-99 data of 49.5 bcf/d on avg. History indicates storage draws to begin around the 80 heating degree days range. 1Q99 and 4Q99 data proves that storage is continuously being outperformed, suggesting that discussed inventory depletion is real. Storage levels, in Simmons opinion, will be at or below 1000 bcf in 1Q00 and falling towards 852 bcf in 1Q01 and 830 bcf in 1Q02. Cyclical storage building over the summer months, while obviously remaining, will trend lower. Price history shows storage inventories below 1000 bcf, last seen in 1Q94, 96 and 97, result in 3 month-strip prices above $2/mcf throughout the year. Simmons estimates this to hold true for 2000 and beyond. Gas-directed rig count remains at high levels, though having eased a little in late 1999, while oil-directed rig count is picking up. Simmons therefore believes gas production to remain essentially flat in 2000. Notable in the discussion was especially the importance given to the increase in effective decline rates of newly developed producing wells in the GOM, having risen to levels well above 40% per annum since 1993 and 50% p.a. for wells completed in 1997-98 (justifying the term "half life", which got a few laughs). Implications of these decline rates seem to be an increased pace of depleted reserve replacement, indicating a need for further exploration and quicker development spending cycles. Not discussed, though perhaps equally important, is the question of AGA summer injections, which were low at around 1600 bcf in 1999, but may be different in 2000, considering previous years' levels. All in all, Simmons also remains in line with most other analysts on its estimates, though veering slightly lower in its storage level forecasts. Constraints in quality rigs are not expected within the next 6-12 months, though a definite demand increase is forecast. Possible labor shortages are not factored into their analysis and were predicted as being either unlikely or irrelevant. Data used: DOE, AGA, Bloomberg and Baker Hughes. Bibliography: none Word Count: 891
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