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Oil prices could hit $50 a barrel, analysts say

By BRAD FOSS
The Associated Press

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"The fundamental fact is that oil is tight," says Leo Drollas, chief economist for the London-based Center for Global Energy Studies. Drollas believes $40 is a more likely price in the next month or two, although if demand is strong and the weather is cold this winter, prices could reach $50.

Prices might leap even higher if there was a major supply disruption, analysts said.

Even at $50 per barrel, prices would be about 12 percent less than they were leading up to the first Gulf War, and more than 40 percent below the levels reached during the oil crisis of the early 1980s, when inflation is taken into account.

Of course, current high prices could begin to sap demand for gasoline and weaken the broader economy — both of which would cool today's red-hot oil markets.

And while a terrorist attack in the United States would cause a brief run-up in the cost of oil, analysts said that would likely be followed by a longer-term decline in prices because of the negative impact such an event would have on the economy.

Yesterday, oil futures retreated from record highs set the day before as concerns about Russian supplies abated and government data showed U.S. gasoline supplies rising. That still left oil for September delivery at $42.83 per barrel, or about 35 percent higher than a year ago.

The main reason for soaring prices nowadays is that global demand has risen faster than producers had expected, leaving the market with very little cushion in the event of an unexpected supply problem, terror-related or otherwise.

PFC Energy, a Washington, D.C.-based consulting firm, estimates that total global production will average 82.1 million barrels a day in 2004, or just 100,000 barrels a day above consumption.

"OPEC is putting out a lot of oil, but the market is absorbing it," said Jamal Qureshi, an oil-market analyst at PFC Energy.

On Tuesday, U.S. light crude for September delivery closed at $44.15 — an all-time high on the New York Mercantile Exchange.
 
Recent geopolitical uncertainty in countries such as Russia and Iraq has made energy traders edgy, raising fears that the supply-demand balance could tilt further in the wrong direction.

There is also concern about production out of Nigeria due to labor unrest, and out of Venezuela, due to political uncertainty. In less than two weeks, there will be a presidential recall ballot in Venezuela, a major oil exporter to the United States.

Recent attempts by Saudi Arabia, the world's leading oil producer, to soothe markets have failed, analysts said, because there are doubts about how much more actual supply the country can add in the short term.

It could take several years before significant amounts of new capacity are added around the world in places like Central Asia and in deep waters off the coast of West Africa, analysts said. Keep in mind, they added, global demand is likely to keep rising during that period.

"It doesn't seem any supplies available in the near term will dampen prices," said Peter Beutel, president of energy consulting firm Cameron Hanover in New Canaan, Conn.

"I don't know if we'll see $50, but it looks like prices want to climb higher here," Beutel said.

Worldwide demand for oil has grown by nearly 3 million barrels a day, or 3.6 percent, in the past year, according to PFC Energy, with about a third of that extra consumption occurring in China. Demand is up by about 350,000 barrels a day in the United States.

"The demand growth in China and the U.S. has caught a lot of the producers by surprise," said Phil Flynn, an analyst at Alaron Trading in Chicago.

He believes that the sharp decline in prices in the late 1990s has resulted in a legacy of hesitancy among major oil companies to invest significant amounts of capital into exploration and production. The price of oil fell below $11 per barrel in December 1998, due to abundant supply.

Even with signs of global oil demand rising — and gasoline prices shooting above $2 a gallon this summer — "They didn't want to believe it because they've been burned in the past," Flynn said. "Now they're behind the 8-ball and are going to be playing catch up for years."

Many analysts are predicting oil prices will average $35 a barrel in 2005. But that doesn't factor in an unexpected loss of supply.

"The thing is," Flynn said, "a lot of stuff has to go just right for us to avoid $50 a barrel."