09/10/2000 - Sunday - Page F 2 STREET SMARTS Winter Sequel in Store on High Oil Prices Analyst says rising prices are certain, but the upper limit isn't

John Kilduff was interviewed by financial markets reporter James Bernstein.

JOHN KILDUFF John Kilduff has been analyzing the oil industry for nearly a decade. He is currently a senior vice president for risk management at Fimat USA Inc., a commodity trading company in Manhattan owned by Societe Generale Bank of Paris.

He previously worked at ABN Amro, a large Dutch bank, and earlier, for Metallgeselschaft Corp., a German industrial and trading company. Kilduff also worked as a fixed-income and derivatives attorney for Lehman Bros.

Q: Given the likelihood that OPEC will agree to boost production at its meeting [today], are we pressing the panic button too soon on home heating oil? A: I don't think so. The numbers you're seeing about inventories in the Northeast being 54 percent below last year are accurate. That's big. Due to the call on the refining industry to meet gasoline demand, there's going to be a record amount of maintenance work at the refineries. So they have to ramp down production at the plants. There is reason to be concerned.

Q: So where might we see home heating oil prices this winter? A: I'm not sure you won't see $2 a gallon for home heating oil. That's pretty close to disaster. I think it will persist throughout most of the winter. Consumers are in for some sticker shock. After all, last year, average prices were $1.30 to $1.40 in the Northeast.

Q: What do you think all this means for the stock market? A: It has a cooling effect on the market. But I can tell you, for the second quarter in a row, oil companies have record earnings. I would expect that to continue. I expect oil services to do well. Who gets hurt badly? Transportation. The trucking companies, the airlines, the cruise ships, the Federal Expresses of the world.

Q: What's this maintenance work you're talking about? A: Refineries are complex operations. They're huge, modern engineering marvels. As a result of their complexity and environmental regulations, they have to get a tune-up from time to time. That causes them to run at reduced rates. They're processing less crude and producing less heating oil and gas. As a result, prices go up.

Q: Last winter, we had a brief run-up in prices during the first cold snap, then a quick decline as the cold weather moderated. What happens this year if the cold lasts longer? A: I think the political pressure on the industry would prevent them from going much higher than $2 a gallon. But it is a market-driven pricing situation, so the potential for higher prices is there. There's little to stop it other than political pressure.

Q: What's the outlook for gasoline prices for the fall? A: Unfortunately, they're going to stay high. That's mostly the result of crude prices over $30 a barrel. It's the supplies in the U.S. OPEC is producing, but we need more oil from them. They're reluctant to produce more now. There's no real incentive for them to produce more.

Q: How do you think OPEC views things these days? A: I think they're just sitting back and looking at things and saying the world economy is mostly booming and it has been produced by cheaper oil. They want their share. I can tell you the statements by OPEC have bordered on belligerent toward the West. When crude oil crashed to $9 a barrel or so, they were embittered by that. They are afraid to death of prices crashing again.

Q: But if they push prices up, aren't they risking worldwide recession? A: They are, and the Saudis are the most keenly aware of that. Prices over $30 are bad for OPEC. It causes economies to slow. Asian economies are affected, Japan is affected, even our own economy is certain to buckle. It's bad business for them. For the time being, they're willing to hold these higher prices without causing a crash. But there's evidence of a slowing of economies.

The problem OPEC has is if they increase production, they find themselves with an oil glut in 2001 and they're back to $10-a-barrel oil. They're trying to manage a soft landing.

Q: But do you think American consumers are being victimized by anyone? A: Certainly we are up against the cartel. Anytime a cartel gets together and flexes its muscles, it causes prices to go higher. We are at their mercy.

We import 60 percent of our crude oil needs. We are completely dependent on foreign supply for our energy needs. There's no real conservation efforts.

Q: The economy seemed to be humming along just fine, and all of a sudden earlier this year, there were these high oil prices. It was a shock, no? A: I think given the strong run-up in crude prices and the demand for gas we saw throughout the winter and the depletion of gas inventories nationwide, it wasn't unexpected.

Q: So people shouldn't have been surprised? A: I think gas supplies and energy supplies overall are taken for granted and don't get noticed until it starts to get noticed in people's pocketbooks.

As the prices went even higher, there was some warning. Senator [Charles] Schumer (D-N.Y.) was talking about this before prices went up and gas stocks depleted. The alarm bell was sounded by him, and it started getting picked up in the papers as well. We saw it in the futures prices.

Q: What did you think when you first started seeing prices climb? A: Throughout 1999, as crude prices worked their way higher and higher, there was a lot of disbelief in the industry that prices would remain this high. We had come from $9 oil and we quickly got over $20. The feeling was it had to go down. It did for a few weeks as refiners ramped up production in response to the extraordinary value of gas. We got some relief in April. But the whole cycle reprised itself because of the continued strong demand for gas and crude oil worldwide.

Q: Are you surprised there've been so few conservation efforts in the U.S.

after the oil shortages of the 1970s? A: I am surprised it is a lesson that has been forgotten. The American consumer rallied to the cause then. For years, the smaller Japanese cars and fuel-efficiency standards were increasing. Then a few years ago, those standards were forgotten. People were buying behemoths again. It's human nature.

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-- Martin Thompson (mthom1927@aol.com), September 10, 2000