Oil guru forecasts price to remain over $30

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Oil guru forecasts price to remain over $30

By Philip Thornton, Economics Correspondent

13 September 2000

Oil prices will stick above $30 a barrel for at least another year despite Opec's agreement to increase output, a leading analyst warned yesterday.

Although the price of crude slipped back yesterday, Steven Strongin at Goldman Sachs said oil would continue to suffer extreme volatility. Analysis by the investment bank showed there was a 5 per cent chance the price would hit $67 over the next year.

In London, Brent for October delivery was last night down 92 cents a barrel at $32.70, having hit a decade high of $34.60 last week and $34.37 earlier yesterday. Dealers said the fall was a correction after recent sharp gains and analysts expect prices to resume rising soon.

Mr Strongin, director of commodities research, warnedcurrent oil prices would have a "dramatic" impact on Western countries in the form of high transport costs. But he did not expect a repeat of the oil shocks of the 1970s, which triggered global recessions.

He said oil producers were so close to capacity there was only another 735,000 extra barrels a day immediately available. "In an environment where stocks are zero and the tanks are empty what matters is what you can deliver now. Supply constraints will stay with us throughout next year and will peak in severity this year."

Although there would be a drop in demand for oil, localised shortages would trigger short-lived spikes in the price. Mr Strongin said the resulting "tremendous volatility" meant benchmark Brent crude prices wouldaverage more than $30.

He said there was a risk the rising oil price would affect economic growth, especially if there was a cold winter. "Whatever it is, it will be transient and temporary, although it may be dramatic," he said.

The structural change in Western economies meant the effect would be seen in higher fuel costs for consumers rather than a recession caused by an industrial shutdown. He said economies such as Japan, India, Brazil and Korea would be worst affected by winter shortages.

Peter Dixon, at Commerzbank in London, doubted there would a repeat of the "stagflation" of the 1970s but said central banks needed to be wary. "If the worst fears of the oil-pessimists are realised, and oil prices spike up to $40 or even $50 a barrel, this is certainly going to place a lot of pressure on those banks with explicit inflation targets," he said.

In the US, Michael Moskow, aFederal Reserve member, said oil prices were starting to feed into inflation: "It's possible they're spilling over to some extent." Asked what impact another oil shock would have on economic activity he said: "Probably a much smaller one."


-- Martin Thompson (mthom1927@aol.com), September 13, 2000


Did I read that right? A chance that oil could hit $67 a barrel over the next year?

In that case, goodbye economy.

-- Wellesley (wellesley@freeport.net), September 13, 2000.

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