Oil prices may shock again

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23/10/2000 08:25 - (SA) Oil prices may shock again Tanya Pang Singapore - Consumers battered by this year's oil price shock may not have seen the worst.

Fresh pain for them, and the world economy, could be in store if a big winter chill hits US or European consumers already running low on stocks of heating fuel, analysts say.

And the world's most volatile commodity market could pile on agony again if an anticipated gap in Iraqi export loadings in December lasts more than a few days.

"The oil market reacts on fears of what might happen. The key question is always: how likely are these events?" said Leo Drollas at the London-based Centre of Global Energy Studies.

A lengthy surge higher appears unlikely for now, but a price spike of some weeks is firmly within the realms of possibility.

World oil production - at full tilt everywhere outside Saudi Arabia - has little margin for error ahead of a northern hemisphere winter that will see the highest demand in history.

"The potential for a price spike looks high, should a serious winter freeze set in or Iraq disrupt its flow of exports," said Deutsche Bank in a recent report.

Either event on its own would lift markets. But both events happening at once would send prices hurtling higher.

BEYOND $40?

Add to that an outage at a big refinery or oilfield complex at a time of high tensions in the Middle East, and prices could spike beyond $40 a barrel, some say.

More bloodshed in oil exporting Nigeria and political turmoil in fellow Opec member Indonesia may also test nerves on a market that hit 10-year highs in the mid-$30s this month.

"If production were lost from either country, the impact on energy markets would be catastrophic," wrote Petroleum Finance Company chairman J. Robinson West.

"The scale of human suffering would be enormous."

In particular, US fuel stockpiles at the lowest levels in almost a quarter of a century have left many wondering if American homes and offices will stay warm if chilly weather is especially severe.

The International Energy Agency (IEA), the West's energy watchdog, estimates that extreme weather scenarios are enough to swing heating fuel demand up or down by as much as 500 000 bpd.

"Declining oil inventories are a source of great concern to the oil market at the moment and oil prices may go even higher if we do not see any reverse in that trend soon," said James Brown, Asia-Pacific energy analyst at Merrill Lynch Singapore.

SUPPLY EVEN MORE OF A CONCERN

Opec member Iraq might be tempted to press a campaign for an end to sanctions by curbing export flows when it renegotiates a new tranche of a UN oil for food exchange in December.

New crude supplies also are under operational constraints. Within the Organisation of the Petroleum Exporting Countries, only Saudi Arabia has any appreciable spare capacity.

And outside Opec, production growth is expected to slow roughly 55% next year as a drought in exploration and production investment catches up with the industry, analysts say.

Oil companies that slashed exploration budgets two years ago when oil sunk below $10 a barrel are gradually picking up new projects but long lead times will limit extra barrels.

Post-Gulf War peaks of more than $35 a barrel have already sent an uncomfortable shiver through the corridors of finance ministries and central banks around the world.

So far economies appear to have weathered the 2000 oil spike relatively unscathed, but a bounce to $40 or more would begin to hurt, economists say.

In Europe, where governments were surprised in September by a barrage of fuel tax protests that caused widespread chaos, high taxation and duties would provide some cushion.

NOBODY WINS LONG-TERM

In the United States, however, consumers would feel the impact after just a week or so, and that would in turn impact on Asian economies highly dependent on North America for exports.

"Asia is the most oil intensive region, it spends the highest amount on oil per unit output of gross domestic product primarily because of manufacturing," said senior economist Bhanu Baweja at IDEA Global in Singapore.

"The Asian region would stand to lose the most from any further (oil) surge and we probably haven't seen the worst (prices) yet," Baweja said.

Nor would producers gain from any long-term price spike. Mehdi Varzi, of Dresdner Kleinwort Benson, said a spike to $40 or $50 would spell disaster for the oil market next year because it would depress growth in the world's demand for oil.

"The higher oil prices go, the greater the risk to the downside next year. How low could it fall?" Varzi said.

"On balance it won't happen, but if it did, it would be very bad news for the world economy and, following through, oil demand. It would be very bad for oil companies and for Opec."

http://www.news24.co.za/News24/Finance/Markets/0,1466,2-8-21_929989,00.html



-- Martin Thompson (mthom1927@aol.com), October 23, 2000


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