Saudi Arabia pulling down oil prices
By Andrew Mitchell
NEW YORK (Reuters): Alan Greenspan may not have to worry about rising U.S. energy costs for much longer -- Saudi Arabia's initiative to lower world oil prices looks to be working, analysts said on Friday.
Crude prices have dropped below the all-important US$30 a barrel mark on growing evidence of increased Saudi supply, and analysts now predict a rapid move down to a range the Clinton administration will find much more comfortable.
"It's going to slip down from here. We're going to be at $25 by late summer or early fall," said Roger Diwan of Petroleum Finance Company (PFC) in Washington.
"The Saudis want prices to come down. They've got more to lose than anyone else in OPEC from too high a price," said Gary Ross, president of Petroleum Research Industry Associates (PIRA) in New York.
This will be music to the ears of Federal Reserve Chairman Alan Greenspan who said on Thursday that rising energy costs were capable of becoming a major nuisance to the U.S. economic juggernaught.
Prices have fallen more than three dollars from over $32 in less than a week on growing evidence that No. 1 world oil producer Saudi Arabia was making good on an early July pledge to lift supply by 500,000 barrels per day and cool prices.
While consultations with fellow members of the Organization of the Petroleum Exporting Countries failed to win consensus on a group output hike, Saudi crude customers say they have been offered substantial extra supply for August anyway.
The Saudi move has switched attention to physical crude markets, where weakening demand has been signaling for some weeks now that there is ample crude oil supply to meet refinery needs.
This should allow the industry to rebuild still slim stocks of spare oil and ease the threat of heating oil shortages and more price spikes this winter to follow this summer's gasoline price panic.
"The U.S. gasoline scare has calmed...demand seems to be lower than expected, global stocks are rising quickly, the Atlantic Basin seems well supplied with crude," said Deutsche Banc in a recent report.
The Clinton administration has been trying for six months to wring more supply out of OPEC. Now weaker market fundamentals could finally spur an exodus from bullish speculative hedge funds that have made hay from oil's rally from $10 to $30.
"There seems to have been a sea change in the market's psychology. The speculators may have decided they've got as much out of this rally as they're going to," said Nauman Barakat of ABN Amro bank in New York.
Inventories are still low enough that a major supply disruption, such as a halt in Iraqi exports, would send prices shooting back up into the $30 danger zone.
Otherwise, a move down to the $25 price that Saudi has made clear it wants -- while still well above the $20 average U.S. crude futures price over the last decade -- will at least allay inflation fears which were threatening to become an major issue this election year.
"There are going to be heightened political sensitivities in the U.S. as we hit the political convention season and the last thing the Saudis want is oil to be an issue there," said PIRA's Ross.
Saudi Arabia -- which holds a quarter of the world's remaining oil reserves -- has decided it can't afford to risk $30 dollar plus prices cutting off demand for its precious commodity.
The oil market's herd instinct could send prices lower at a speed even Riyadh finds uncomfortable. Prices fell a dollar on Friday alone and analysts warn that other OPEC suppliers could follow Saudi's lead in cheating on quotas.
But there is relatively little spare capacity outside Saudi Arabia, and modest supply growth outside the cartel combined with still low global inventories should prevent a repeat of 1998's price crash, the analysts add.
"Saudi will be able to pull the barrels back if prices go down too far," says PFC's Diwan. "The environment means they'll be able to do some damage control."