Nov. 15 (Bloomberg) -- Middle East benchmark crude oil prices may drop below $50 a barrel after 2009 as Saudi Arabia and other nations boost output to supply expanded refining capacity, Nippon Oil Corp. said.

A possible slowdown in demand growth led by China may contribute to lower Oman and Dubai oil prices within four years, Naoaki Tsuchiya, general manager of the overseas business division at Nippon Oil, Japan's biggest refiner, said in an interview on Nov. 8.

Saudi Arabia and Kuwait are among Middle East nations investing in refineries globally to meet a shortage of capacity that increased fuel-making profit margins. The Organization of Petroleum Exporting Countries blamed the lack of refineries for boosting New York oil prices to a record $78.40 a barrel on July 14, along with increased fuel demand in Asia.

``Year 2009 and 2010 will be the turning point'' for crude oil demand, Tsuchiya said. ``The refining capacity shortage prompted price spikes in 2005, and the opposite thing could happen in about 2009 and 2010.''

Oil prices in New York rose to all-time highs partly because of hurricanes that hit the U.S. Gulf in 2004 and 2005, shutting offshore fields and onshore refineries. Tsuchiya expects New York oil to average $55 to $65 in 2007, lower than this year's average of about $67 so far.

`Climbed Too Much'

``Prices climbed too much this year, despite negative fundamental signs such as deteriorating margins and high inventories,'' Tsuchiya said. ``High oil prices have cut demand and refineries in Japan, South Korea and China are posting red numbers from processing.''

Crude oil prices in New York haven fallen 26 percent from the record reached in July and traded at $58.47 a barrel today. Oil slipped 4.7 percent the past three days, the biggest three- day decline since mid-September.

Inadequate investment in Europe and the U.S., where no new refineries have been built since 1976, had helped to drive refining margins to records in 2005 as economic growth spurred demand for gasoline and diesel. Middle Eastern producers and publicly traded companies such as Reliance Industries Ltd., SK Corp. and Chevron Corp. are seeking to plug the gap in Asia, Europe and the U.S.

New Refineries

``There are many refinery projects that are scheduled to commence around 2010,'' Tsuchiya said. ``It could have a negative impact on both crude oil and fuel markets.''

Saudi Aramco, the world's biggest oil company by output, plans to invest about $50 billion over the next five years to expand refineries in the nation and overseas, Khalid al-Buainain, Aramco's vice president for refining, said in May.

Aramco has teamed up with ConocoPhillips, the third-largest U.S. oil company, to build a 400,000 barrel-a-day refinery in Yanbu on the Red Sea Coast. Kuwait is in talks to build a refinery in Louisiana, the second-largest oil-processing state in the U.S.

``Global capacity expansion may narrow processing margins, resulting in price falls,'' he said. ``Increased refining capacity may become a negative factor for oil market.''

China, the fastest-growing major economy, is expanding refining capacity to ensure growth that exceeded 10 percent for a third quarter. The nation aims to raise its oil-processing capacity to 355 million metric tons a year by 2010 from 285 million tons in 2005, the National Development and Reform Commission said in March.

Margins

The price difference between gasoline and Dubai, a measure of the profit to be made from processing crude, has declined to $4.52 a barrel in the fourth quarter of this year, compared with an average $11.08 a barrel in the third quarter, according to Bloomberg data.

The margin was once widened to $26.57 a barrel on May 15 this year and the lowest was at $2.51 a barrel on Nov. 6.

Reduced profit is prompting some companies to cut back run rates at their plants. Nippon Oil may process less oil this month if milder-than-usual weather persists, Vice President Naokazu Tsuda said last month. Japan's inventories of kerosene, used as heating fuel, rose to record of 5.46 million kiloliters on Oct. 28, according to Petroleum Association of Japan.

``We haven't been buying many spot oil cargoes from the Middle East in past one and two months because of weak demand,'' he said.

Crude oil in New York, a global benchmark, may stay above $55 a barrel for the next two years as demand remains robust in China while a glut narrows refining margins in other countries, he said.

Oil consumption in China, the biggest user after the U.S., may grow 5.4 percent to 7.39 million barrels a day in 2007 and continue to expand 5.5 percent in 2008, the International Energy Agency said on Nov. 10. The IEA is an energy adviser to 26 nations.

``For the next one or two years, I don't think Middle Eastern oil prices will fall below $50,'' Tsuchiya said.

To contact the reporter on this story: Megumi Yamanaka in Tokyo at myamanaka@bloomberg.net.

Last Updated: November 15, 2006 00:36 EST