why a squeeze on stocks may push oil price to $40

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Fair use for educational/research purposes only! The Daily Mail Deputy City Editor on why a squeeze on stocks may push oil price to $40 Brian O'Connor 5 September 2000

It took Saddam Hussein's invasion of Kuwait to send oil to $40 a barrel 10 years ago. This time, a cold snap could do the trick. Confounding those who were confident that the glut would never be soaked up, crude oil supplies are still tight around the world.

More to the point, they are desperately short in the gas-guzzling USA. That is causing anguish among America's freeway-loving motorists as their fuel bills mount.

The alarming aspect is that the oil price shows no sign of stopping. Having rebounded from below $10 at end-1998, it reached $22 a year ago, paused for a while, and then went on climbing.

North Sea Brent crude for immediate delivery rose to $35.25 last night. The price falls if you can wait, but only to $32.60 for October, up $1 on the day, and to $32.10 for November.

Nor can Opec be entirely blamed. Its president, Venezuelan oil minister Ali Rodriguez points out that raw materials make up just 12p in the pound of the petrol pump price, while the average tax is 60p (61.5p in Britain).

Opec could help by turning on the taps at its September 10 meeting. Soothing talk of a 'fair' price of $25 came from its secretary general. But even if it does pump out more, it will take a month for extra supplies to reach the fuel-starved US. If it gets cold in the meantime, we could see $40 - some say $50.

Presidential hopeful Al Gore is blaming big oil companies. He is partly right. When the price dipped to $10, they took an axe to costs. Tough targets for return on capital were helped by eliminating waste everywhere. That meant keeping stocks at a minimum.

It also meant that early this year, as crude became dearer and their refineries became less profitable, the US giants stopped buying. When demand picked up sharply in the second quarter, US stocks of oil plunged to their lowest for 24 years. Across the main Western economies, stocks have shrunk by 200m barrels in 12 months.

So while the world economy is booming, with a near-5% global growth rate on the cards for this year, stocks have been run down so fast that there is no safety margin.

The optimists now expect Saudi Arabia, the one big producer that can pump up supplies sharply, to come to the rescue. Crown Price Abdullah is to meet President Clinton this week. Eventually extra Saudi barrels could tilt the market back into balance.

This is becoming important. So far, stock markets have shrugged off the price surge as temporary. But it has already pushed up euroland inflation and interest rates. If it stays high, worse will follow.

Unless Opec comes to the rescue, Alan Marshall, at broker CLSA, expects crude to stay around $30 until year-end and above $20 until end-2001.

Apart from Opec, oil company investors are the ones who should be laughing. But for months, the sector refused to follow the crude price, reckoning it would soon subside.

Paul Spedding at Dresdner Kleinwort Benson says: 'The shares are not reflecting $30 oil.' Though Shell and BP have reached a five-year peak, they could have further to go. Explorers such as Enterprise and Lasmo are still well below previous highs, though now much more profitable.

All this has happened without any help from Saddam. It used to be said that it would only take a single bullet to send the oil price soaring. This time all it took was a few accountants.

http://www.thisismoney.com/20000905/nm20070.html

-- Martin Thompson (mthom1927@aol.com), September 05, 2000


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