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How Low Can Oil Prices Go?

News: Analysis & Commentary: ENERGY


Asian woes and rising supply could drop crude to $15 a barrel

Are oil prices headed lower? The price of crude has tumbled 28% since October, in the wake of a sudden drop in demand from ailing economies in the Far East, mild winters in the U.S. and Europe, and an ever-expanding supply. Not even the prospect of a meeting of oil ministers from the Organization of Petroleum Exporting Countries to discuss production on Jan. 26 or Iraq's continuing bellicose taunts have made a difference. On Jan. 21, oil futures sank to a 4-year low of $16.15 a barrel after the American Petroleum Institute reported that U.S. oil inventories ballooned by the largest weekly amount in a decade.

And there's no reason to believe the situation will change soon. Asia's economic woes are still being sorted out, the world is awash in supplies of everything from gasoline to heating oil, and new fields in the North Sea and elsewhere promise to boost this year's inventories. "There's enough oil that prices could go to $10 a barrel," warns analyst Ken Miller of Houston-based energy consultants Purvin & Gertz Inc. He expects oil prices to slip to $15 a barrel by February.

QUOTA HIKE. The one thing that could halt the slide, he says, is an OPEC agreement to curtail production--a move many analysts think unlikely. In November, Saudi Arabia pushed through a 10% increase in members' 1998 production quotas--a move that benefits the Saudis primarily since many of the other producers were already exceeding production limits. "The pain will have to be great to force them to do something," says Leo P. Drollas, deputy director at the Center for Global Energy Studies, the London-based oil watchers. Agrees Robin West, president of Washington-based consultants Petroleum Finance Corp.: "The Saudis are sick of everyone eating their lunch."

For consumers, OPEC's pain is all gain. Heating oil, gasoline, and natural gas are following crude down. In the depths of winter, a gallon of heating oil in New York State costs homeowners $1.03--down 14% from $1.20 in September. On the futures market, natural gas is trading 28% below year-ago levels. Nationwide, the price of a gallon of unleaded regular gasoline is down 8.5% from a year ago, to $1.12.

Asia's gloom continues to be the biggest damper on crude prices. Consumption by the now-tamed Tigers, which drove prices higher in recent years, is slowing dramatically (chart). Purvin & Gertz recently lowered its 1997 estimates of the region's 1998 demand by 500,000 barrels a day, and 700,000 barrels a day for 1999. Indeed, suppliers in the Middle East are diverting their oil cargoes from the area to flusher markets in Europe and North America.

Another factor preventing a quick fix is OPEC's chief renegade, Venezuela. Its Oil Minister refused an invitation to attend an OPEC emergency meeting in Vienna. What's more, it's running full steam ahead. In 1998 Venezuela will increase production to about 3.6 million barrels a day from 3.2 million barrels at the end of last year. "We are not changing our plans," insists Jose Toro Hardy, a director at state oil company Petroleos de Venezuela (PDVSA).

HIGH RIG DEMAND. Outside of OPEC, oil giants are also bringing more oil to market this year. Producers such as Phillips Petroleum Co. say it would take six months of $16-a-barrel oil to force a review of their spending plans for exploration. Meanwhile, the U.S. Energy Dept. estimates that new oil fields now being primed in the North Sea will alone add 400,000 barrels of production both this year and next. Indeed, oil-drilling contractor Global Marine Inc. says demand for rigs has never been better. "That market is strong," says Global Marine President Jack Ryan.

That leaves it to Saudi Arabia to rein in the market's surplus. But it shows no signs of backing off its current plans. Indeed, on Jan. 21, PDVSA Chief Executive Luis Guisti claimed that the Saudis are already producing 400,000 barrels a day in excess of its recently increased OPEC quota. If he's correct, it suggests that Saudi Arabia isn't about to reverse course soon. For now, at least, the Saudis appear willing to put volume ahead of price. Fill 'er up.By Gary McWilliams in Houston, with Jane Knight in CaracasReturn to top

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