Rising Crude-Oil Prices May Lead to Supply Shortages

Source: Knight Ridder/Tribune Business News

Publication date: Feb 15, 2000

(By Russell Ray, Tulsa World, Okla. )

Feb. 15--The price of crude oil soared to new highs Monday as supplies continued to dwindle under OPEC's plan to limit production.

Fears that the production cuts could lead to supply shortages pushed the price of light, sweet crude above $30 per barrel for the first time since Jan. 16, 1991, the eve of the Persian Gulf War. Crude oil for March delivery rose 81 cents to $30.25 per barrel on the New York Mercantile Exchange.

The price of Oklahoma sweet crude, the state's most abundant grade, rose to a nine-year high of $27.50 per barrel.

Oil prices have been rising for several months because of production cuts implemented last March by the Organization of Petroleum Exporting Countries. The cartel agreed to the cuts after a glut in world oil supplies caused prices to fall below break-even levels, OPEC officials said.

"I expect to see a continued decline in production," said Rick Chapman, executive director of the Oklahoma Commission on Marginal Oil and Gas Wells. "People don't have the investment dollars to produce more oil."

In addition, Iraq has slashed its oil exports, and workers at Petroleos de Venezuela S.A., Venezuela's national oil company, may go on strike, Chapman said. Venezuela is OPEC's third-largest producer. The situation may lead to supply shortages at some U.S. refineries, Chapman said.

The price for Oklahoma's benchmark grade of crude oil has risen 21 percent since the beginning of the year. The price bottomed out $8 per barrel in December 1998. In 1999, however, the price more than doubled, reaching $22.75 by the end of the year.

The higher prices haven't launched Oklahoma producers back into production, but they have generated capital for some much-needed repairs, said Jim Hawkins of Tulsa-based Hawkins Oil and Gas Co. "It allows us to go back and rework and service wells that went down when the price was $8," Hawkins said. "Most of the response to this has been remedial work."

Uncertainty about OPEC's actions have prevented domestic producers from renewing drilling activities. Although prices have more than doubled, the risk for producers is still too high, Hawkins said.

"Nobody is going to do a whole lot of anything right now," he said. "We know we're on a slippery slope."

However, Hawkins said he will increase drilling activity if prices remain at present levels.

"We have some projects that are economic at this level," he said.

U.S. oil supplies fell to a 23-year low of 282.6 million barrels in the last week of January, according to the American Petroleum Institute. U.S. supplies have since risen 689,000 barrels.

Industry observers speculate that producers won't be able to increase inventories fast enough to avoid shortages at refineries.

"Even if we get some additional output, there's an imbalance and it could take some time to get new supplies into the market," said Tom Bentz, a broker at Pariba Futures Inc. in New York.

Saudi Arabia, the world's top oil producer, Venezuela and Mexico will meet March 2 to discuss whether to continue the production cuts. The same three countries orchestrated last year's agreement to limit production by more than 2 million barrels per day.

OPEC ministers are scheduled to discuss the same issue during a March 27 meeting in Vienna. ----- To see more of the Tulsa World, or to subscribe to the newspaper, go to http://www.tulsaworld.com. (c) 2000, Tulsa World, Okla. Distributed by Knight Ridder/Tribune Business News. Publication date: Feb 15, 2000 ) 2000, NewsReal, Inc.

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