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Oil prices likely to stay down in coming months

Saturday, January 19, 2002

LONDON -- Terror attacks, sluggish economies and mild winter weather limited growth in global demand for oil last year, and crude prices are likely to stay weak for the next few months as a result, a respected survey said Friday.

However, a coordinated cut in oil output by OPEC and non-OPEC producers that took effect this month could help nudge prices higher later in 2002, the International Energy Agency said.

Oil demand increased last year by a mere 100,000 barrels a day -- or 0.13 percent -- to 76 million barrels a day, making last year's growth the weakest since 1985. Relatively high prices for crude contributed to the paltry growth by causing some consumers to switch to cheaper forms of energy.

Demand among oil-dependent wealthy countries actually contracted during the fourth quarter of 2001, by more than 600,000 barrels a day compared to the same quarter in the previous year, the IEA said in its monthly oil market report.

The Paris-based agency is the energy watchdog for the Organization for Economic Cooperation and Development, which groups these rich oil-importing nations.

World oil supplies averaged 76.54 million barrels a day in December, a decrease of 120,000 barrels a day from the previous month, it said.

A decision by Russia, Mexico and three other independent producers to cut production led the Organization of Petroleum Exporting Countries to trim an additional 1.5 million barrels from its own daily output starting Jan. 1.

If adhered to, these combined cuts of almost 2 million barrels a day have "the potential to put a floor under crude prices and set the stage for later price gains," the IEA said.

Signs that the U.S. economy might sputter back to life by midyear suggest that growth in demand for oil will accelerate to 600,000 barrels a day in 2002.

"I think everyone is starting the year very gingerly looking at demand numbers. Certainly there are significant signs that the economic healing process is beginning," said Peter Gignoux, head of the petroleum desk at Salomon Smith Barney in London.

Still, the IEA's projected rise in demand won't be enough in itself to absorb the expected growth in non-OPEC supplies of 800,000 barrels a day. The implication for OPEC is disturbing; the cartel might have to slash output on its own to ensure that supplies don't exceed demand.

For now, crude prices are vulnerable to what the IEA called "a fickle market."

The price for light, sweet crude -- the U.S. benchmark -- fell $2.77 a barrel during the first two weeks of this month, due partly to indications of weak U.S. demand and warnings about the American economy from Federal Reserve Bank chairman Alan Greenspan.

An acknowledgment by Saudi Arabia's oil minister Ali Naimi that OPEC's price target of $22-$28 is unrealistically high was also a factor behind the decline in prices, the IEA said.

An important variable in price forecasts for this year is whether Iraq will resume exporting crude at normal levels. Iraq's production fell by 770,000 barrels a day in December due to delays in chartering tankers and a dispute over pricing. This decrease more than offset the 400,000 barrel-a-day increase in output by other OPEC members, the IEA said.

Iraq is OPEC's third-largest producer, but its oil exports are regulated by the United Nations, and it doesn't participate in the group's production agreements.


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