Friday 01 September 2000

Oil prices to stay high until second quarter of next year

CAPE TOWN  The international price of oil was likely to remain at current high levels of over $30 a barrel until at least the second quarter of next year, when it was expected to fall to more normal levels of between $20 to $22 a barrel, according to Deutsche Bank Global Oil Strategist Adam Sieminski. However, it was unlikely prices would return to the $10 a barrel seen in 1998, he said on Wednesday.

Sieminski said there were several factors that would keep oil prices high for the remainder of this year and into next year, including the approach of winter in the northern hemisphere  particularly the US; the inability and/or unwillingness of oil producing countries to increase their production levels substantially; low levels of inventories worldwide; and the unavailability of cheap substitutes for oil over the short-term.

He said that the upcoming winter in the worlds most developed countries meant that demand for oil would be higher over the coming months.

This would be compounded by the continuing round of strong economic growth in most countries, as the US, UK and European economies continued to show robust growth and the Asian recovery gathered force.

The International Monetary Fund continued to revise upward its forecasts for world economic growth, the latest being 3,3% last year and 4,2% this year. Based on these economic growth rates, he estimated, demand for oil was expected to increase by 2%, or roughly 1,5-million barrels a day over the current 77-million barrels a day.

On the supply side, however, inventories remained low, and not enough supply was coming into the system to see them restocked to previous levels until the second quarter of next year, which would be a factor in pushing the oil price lower, Sieminski said.

Meanwhile, most members of the Organisation for Petroleum Exporting Countries (Opec) were operating flat-out, with only Saudi Arabia and, to a much lesser extent, Kuwait, having significant excess capacity to be able to increase production over the short-term.

"Saudi Arabias inability to bring prices down has been surprising," he said.

"Over the longer-term they know the high prices are not in their interest. But currently high revenues are in their interest, as they are helping fund the population boom now taking place."

At the same time, Saudi Arabias additional oil supplies were relatively heavy, containing too much sulphur for many refining operations, which were already stretched to the limit.

"There are just not enough rigs running, and not enough refining and tanker capacity for additional supply," Sieminsky observed.

"The worlds overall capacity in energy is very tight now. This will improve over time, but it will take a while."

To compound supply problems, compliance with production quotas within Opec had been good. Countries with a reputation for cheating, such as Venezuela and Indonesia, were already operating at maximum capacity.

Only Iraqi production remained a swing-factor, he said, with levels depending on the approval of the US and United Nations under the oil-for-food programme.

Non-Opec oil production, meanwhile, had grown fairly strongly this year, but the outlook for the next few years was not as favorable, he pointed out.

After the low prices seen in 1998, production was expected to decline over 2001 to 2003. Politically unstable countries such as Angola, Russia, Yemen, Sudan, and Chad would be the main drivers of the increases, meaning that political risks remained substantial.

The current high price of natural gas also acted as a significant deterrent to consumers to turn to it as a substitute for their oil needs, Sieminski said.

"In the near-term there is not a lot of substitutability. Consumers are pretty much locked in. We need another year of good drilling, or we need a global economic slowdown to bring oil prices down. Neither one looks like materialising any time soon."

For the upcoming Opec meeting, Sieminksi predicted Saudi Arabia would use the gathering to formally approve the additional 500 000 barrels a day of output it had announced unilaterally after the last Opec meeting.

"I suspect they will make the last increase official by agreeing to increase production proportionately by the 500 000 barrels," he said.

"Saudi Arabia seems content right now to see prices continue at current levels."  Sapa, I-Net Bridge.

http://www.bday.co.za/bday/content/direct/0,3523,690430-6080-0,00.html

-- Martin Thompson (mthom1927@aol.com), September 01, 2000

Answers

The high sulphur content, heavy oil factor in Saudi Arabia's additional capacity is not a good sign. Refineries have a tough, tough time with this kind of oil.

-- Wellesley (wellesley@freeport.net), September 01, 2000.