Indonesia cuts projected oil price but doubts linger

Indonesia cuts projected oil price but doubts linger

SINGAPORE (Reuters): Analysts said here yesterday the
US$14.50 new oil price used by Indonesia for its 1998/99 budget
might still be too optimistic.

The regional economic downturn and efforts by Asia's
refineries to boost exports could mean that $14.50 is still too
high, said Kanika Singh, an economist at research house
Independent Economic Analysis (Holdings) Pte Ltd (I.D.E.A.).

"I doubt it will be able to average $14.50 for the whole
year," she said.

Coordinating Minister for Economics and Finance Ginandjar
Kartasasmita told a news conference in Jakarta on Wednesday the
government had set the lower oil price for the 1998/99 budget.

This compared with a price of $16.50 for the 1997/98 budget
and the last formally announced budget price of $17.00 for
1998/99.

However, as recently as last week sources close to economic
review talks between Indonesia and the International Monetary
Fund (IMF) said Indonesia had cut its oil budget figure to
$16.00.

Energy analysts said the oil price forecast was more in line
with market levels.

"The new oil price for the budget sounds very realistic given
that the Indonesian Crude Price (ICP) closely tracks the Brent
price. For the first three months of this year Brent has averaged
about $14.00," said Gordon Kwan, an energy analyst at Daiwa
Securities in Hong Kong.

Daiwa forecasts North Sea Brent crude, a global benchmark
price, will average $16.00 per barrel this year, assuming
Organisation of Oil Exporting Countries (OPEC) and non-OPEC
producers deliver on their recently announced production cuts and
the effects of the El Nino warm weather pattern diminish later in
the year.

The ICP is Indonesia's official price for selling its range of
crudes.

The country produces around 1.4 million barrels per day (bpd)
of crude, of which 800,000 bpd is exported mostly to Asia.

Lars Reierson, Asian energy analyst at Morgan Stanley in
Singapore, said the forecast price also appeared reasonable
considering Brent forecasts for the year.

"Based on our forecasts, it's a reasonable assumption," he
said.

Historically, the average ICP has closely tracked the price of
Brent crude oil. The most-active Brent May contract closed in
London on Tuesday at $13.68 per barrel.

But I.D.E.A.'s Singh said she expected a decoupling of the
usual price relationship during 1998 as Asian factors undermine
the price of domestic crudes.

Asia produces around seven million bpd and imports a further
13 million bpd to meet demand.

Singh said demand from Asia's two biggest volume buyers --
South Korea and Japan -- would fall in line with expectations for
a slowdown in their economies. The two countries purchased around
7.5 million bpd of crude in 1997.

"If you are looking at a fall in the two largest buyers, that
is a severe problem," Singh said.

At the same time, refinery center around the region, including
South Korea, Thailand and Malaysia, are likely to export
increasing amounts of oil products to offset a lack of demand
from domestic markets. That will undermine prices, she said.

Indonesia is hoping that oil prices will rise for the rest of
the year.

As Asia's only OPEC member, it signed last week an agreement
which commits the country to cut crude production by 70,000 bpd,
or just more than five percent. This is part of OPEC's cuts of
1.245 million bpd.

"It's in their interests to cut," Morgan Stanley's Reierson
said, despite the country's immediate shortage of foreign
currency.

However, sceptical markets have not yet fully endorsed the
cuts, waiting for hard evidence that OPEC has actually done so.

On Friday, Indonesian Oil Minister Kuntoro Mungkusubroto said
he would instruct state-oil company Pertamina to allocate the
production cuts among oil contractors.

Analysts said the cut in the budget price for oil would reduce
revenues. But the reduction in rupiah receipts would also be
partly offset by the slump in the currency against the dollar to
8,500 yesterday from 2,500 in the middle of last year before the
regional financial crisis took its toll.