In the fall of 1996, crude oil prices reached $25 per barrel and natural gas prices exceeded $3 per thousand cubic feet. E&P stocks were strong, and oil service stocks were soaring. The oil despair of 1986 and gas despair of 1991-1992 had become distant memories. Over the last 5 quarters, however, the euphoric mood of late 1996 has turned far more measured, and with good reason. Spot crude oil prices have declined by one-third, to the lowest level in over four years. OPEC recently increased its production quotas by 10% in the face of growing nervousness about Asian oil demand. This has understandably added to the concern of those holding long oil positions.

Spot prices for oil have declined over $4 per barrel in the last four months, as several negative supply/demand factors have become more evident. First, the mild winter in the U. S. and in Europe has weakened North Atlantic heating oil markets, and therefore crude oil demand as well. Second, nervousness continues to grow about the potential of the Asian financial crisis to slow demand growth for oil in what had been the fastest demand growth region for over a decade. Third, growth in non-OPEC oil production in 1998 is expected to be larger than the average 1.1 million barrel per day increment of the last 3-4 years. Fourth, global oil inventories have been steadily building over the past year.

On a combined basis, these factors would indicate that OPEC should currently be producing at lower rates, if its objective is to maintain a balanced market. Curbing such over-production has typically required the pain of lower prices to focus OPEC's attention, although the timing of this process has never been precise. Finally, to add to this uncertainty, exports from Iraq in the next few months could sharply increase (with additional UN humanitarian exports), or even sharply decrease (if oil export facilities were targeted in possible U. S. bombing raids).

Against this hazy backdrop, we will review the supply and demand fundamentals for world oil and North American gas markets. Be forewarned that this forecasting process is more art than science, and that many would say that this characterization unfairly gives art a bad name.