Oil price could collapse

Published November 14th, 2000 - 02:00 GMT

Crude oil prices are wobbling on the edge of a collapse next year because of excess supply, experts said on the sidelines of an OPEC meeting in Vienna that wraps up on Monday. 

 

Ministers of the 11-nation Organization of Petroleum Exporting Countries (OPEC) were right to be worried, they said, despite the global outcry over sky-high prices caused by current tight supply. 

 

The price of benchmark Brent quality oil in electronic trading in London on Monday before the opening of pit trading was $32.10 a barrel, far above OPEC's own price band target of $22-28 a barrel.  

 

"We're now at the 30-dollar level, way above the band, and we have a genuine problem," said Leo Drollas, chief economist at London-based Center for Global Energy Studies. 

 

"It is at the knife edge. Honestly, no one knows, it could go either way," he added. 

 

Barring a cold winter or an Iraqi export suspension, which could send prices back up to $35-40 a barrel, prices would either track sideways or drop sharply, he forecast. 

 

"It could either stay at 30 (dollars) or it collapse, go down to 20 within six months or even faster. It is difficult to call this one. In my opinion it is not easy this time," Drollas said. 

 

In a Vienna meeting, OPEC members ignored demands by consumers for an output increase and sought instead a pre-emptive strike to prevent a feared glut leading to a price collapse. 

 

Ministers all but ruled out production increases and called a special meeting for January 17 to assess demand in the winter, critical to estimates about whether a production cut may be needed. 

 

In the medium term, the key question was global supply and demand and signs of OPEC's rising output feeding into stockpiles, said Mehdi Varzi, a London-based analyst with Dresdner Kleinwort Benson. 

 

OPEC has lifted production four times this year. 

 

"This is the big question this year. Demand has risen by about a million barrels per day, OPEC production has risen by three million barrels per day; where are the other two million gone? The numbers just don't add." 

 

Adding to the confusion, Varzi said, was the lack of reliable data with even four-year-old figures being revised. 

 

Current levels were generally considered too high, but OPEC wanted to convince the markets that oil prices should be stuck at higher levels over the long term. 

 

"Nobody I think was predicting something near 30 dollars a barrel for the whole year and certainly it has taken OPEC by surprise as much as anybody else," said Varzi. 

 

"But they are concerned to ... try to convince the market that we really are in a higher trading range; (that) we are not going back to $15-20 oil, we are going to stay above that," he added. 

 

"That is what they are (trying) in a sense to convince the market. Whether they can do it of course is another question. Nobody knows on a two or three-year view how the market is going to react to this big rise in the oil price." But consumers had no fear of sharply-lower prices. 

 

"Consuming countries don't want prices much above $20, really. A lot of countries are saying, okay we have seen the numbers but prices are still high," said Varzi. 

 

That divergence left Saudi Arabia, easily the world's biggest supplier, in a quandary, said Drollas of the Center for Global Energy Studies. 

 

"They want high levels of revenue because they have a huge debt of $160 billion ... and they need cash to pay for their expenses and make some investments and pay their arrears of debt," he said. 

 

"On the other hand they have the United States, their ally, the greatest ally, in an election year obviously with a booming economy. The US does not want oil prices to derail its success." 

 

There was no chance of oil prices halting the powerhouse US economy, he said. 

 

But "there are genuine concerns and the Saudis have been feeling this pressure all along, so they have to walk this tightrope between the need for cash and the need to keep prices high and the pressure from the consumers because prices are high."—AFP. 

©--Agence France Presse. 

 

© 2000 Mena Report (www.menareport.com)

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