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.