09/05/00- Updated 03:50 PM ET

Shortages may drive oil price to $40 Lack of heating oil, gas may lead to winter of discontent

By Dina Temple-Raston, USA TODAY

Crude oil prices could touch $40 a barrel this winter as traders continue bidding up prices in anticipation of shortages in natural gas and heating oil.

"With the cupboards so bare, $40 a barrel oil is entirely possible," says Phil Flynn, senior oil analyst at Alaron Trading in Chicago. "Even if OPEC decides to step up production the sense is whatever they do will be too little, too late. There just isn't enough heating oil to go around if we have a cold winter."

The Organization of Petroleum Exporting Countries meets in Vienna Sunday and traders are watching to see whether the group dramatically boosts production or whether Saudi Arabia breaks with other OPEC members and produce more oil to bring prices down. Analysts expect OPEC will be conservative and decide to increase production by 500,000 barrels a day  raising their daily output to a little above 29 million barrels.

In a little last-minute lobbying before this weekend's meeting, President Clinton will meet Wednesday with Saudi Crown Prince Abdullah in New York to discuss, among other things, the skyrocketing price of oil.

"That's a meeting you would love to be a fly on the wall for," says Bill O'Grady, oil analyst at A.G. Edwards & Sons. "The Saudis aren't going to break with OPEC and produce more on their own. The situation is too delicate."

In March, OPEC tacitly agreed to raise output quotas by 500,000 barrels a day if the benchmark price of oil stays above $28 a barrel for 20 consecutive days. That requirement could be met on Friday, just before Sunday's meeting.

Traders are also awaiting a key inventory report from the American Petroleum Institute to be released Wednesday that will show just how dire U.S. oil shortages are leading into the winter heating season.

In early August, inventories fell to their lowest levels since 1976 and that sent oil prices heavenward, up 21% that month alone.

Analysts say the time has come to shift concern from rocketing gasoline prices to heating oil. The $2.50 a gallon some consumers were paying for gasoline this summer will pale in comparison with the price increases that could hammer them to heat their homes this winter, they say.

"We have 35% or 40% less supply than we did a year ago and last winter the price of heating oil doubled to about $2 a gallon," he says. "If supplies aren't built up, and fast, price spikes we saw in gasoline this summer are going to be repeated in heating oil, it looks like we're heading into an expensive winter."

A precursor could be seen in London Tuesday when oil prices were near 10-year highs of nearly $33 a barrel for Brent. And that's after OPEC members increased output in August to a level not seen for 20 years  29 million barrels a day, according to a new survey of OPEC and industry officials, consultants and tanker trackers.

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-- Martin Thompson (mthom1927@aol.com), September 05, 2000