OPEC Restrictions Expected To Send Oil Prices Soaring

Resurgent world oil prices will blaze towards the highest level since the Gulf War this winter as key producers stick to strict supply curbs, a Reuters survey found last week. Analysts and consultants ruled out any chance that export cartel OPEC's ministerial meeting this month might relax output limits that have already fostered a stunning price rally to 23-month highs. If the northern hemisphere winter proves harsh world benchmark Brent could balloon to post-Gulf War highs at $25 a barrel as the supply stranglehold demolishes global stocks of spare stored oil, they added. "It could go over $25 a barrel as inventories keep tightening, especially if there is a cold snap. The Y2K factor could tighten it too," said Peter Hitchens of Williams de Broe. "As long as key producers give no hint of relaxing output restraint the price of Brent will probably approach $25 in the fourth quarter," said Mike Barry of Energy Market Consultants. A poll of 18 analysts and consultants forecast an average for benchmark Brent crude of $20 a barrel in the fourth quarter, some $4 higher than they were projecting just two months ago. Prices are expected to ease back towards $17 on average next year as producers relax their grip on supplies early in 2000 either by formal agreement or by starting to cheat on official limits, the experts added. Some suspect that OPEC producers could yet ease their supply deal before a March 2000 deadline pledged so far. Prices are already well above an $18-$20 a barrel target range the group has earmarked. "There is little likelihood of raising production in September, but a significant chance they will at the turn of the year or early next year," said Nick Antill of Morgan Stanley Dean Witter. The debate will intensify if the sustained price strength threatens to revitalize output from higher-cost non-OPEC sources and stifle economic recovery in key Asian markets. "At the moment the figures point to a winter stockdraw so enormous it will push stocks down to the lowest levels of 1996. The question OPEC has to ask is does it want to do that?" said Antill. Some argue that as prices rise OPEC producers, still recovering from last year's savage price crash, will be unable to resist pumping more even if there is no formal decision to raise output. "History shows that after four to six months of healthy cashflow then you will inevitably get more cheating," said Catherine Arnfield of CS First Boston. Forecasters admit that this year they face a wild card in the Y2K bug, which could crash computer systems at the dawn of 2000. Supply from key producers might be disrupted as technical breakdowns or electricity failures force fields to shut, the analysts said. Most also expect an element of end-year hoarding as consumers and companies build up spare provisions. But there is little consensus on the scale of problem, while prices could easily shed any Y2K-based gains early next year if nothing goes wrong. "I've put it in the too-complicated-for-me basket," said one analyst.