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Analysts Predict Higher Oil Prices

Posted on: Thursday, 1 April 2004, 06:00 CST

VIENNA, Austria - OPEC's decision to cut its oil output target by four percent starting Thursday will cause prices to rise from their already uncomfortably high levels, analysts predicted.

The Organization of Petroleum Exporting Countries hopes the cut will prevent a price drop this spring, when the global demand for oil usually slips to a seasonal low.

Some analysts, however, said the cut could soon push crude prices above the psychologically important threshold of $40 per barrel and worsen the pain for U.S. motorists.

OPEC, which pumps about a third of the world's oil, agreed in talks at its headquarters in Vienna to reduce its output target by 1 million barrels per day. Although it had announced plans for the cut when its members met last month in Algiers, Algeria, a subsequent surge in prices led a few of the group's 11 members to suggest postponing the decrease.

OPEC had to balance concerns that high prices could choke off economic growth with its own fears that swelling inventories and reduced demand could cause prices to plunge.

Kuwait and the United Arab Emirates proposed postponing the cut, but Saudi Arabian Oil Minister Ali Naimi and the majority of ministers prevailed in their effort to reduce the ceiling to 23.5 million barrels per day.

These ministers blamed speculators and the weak U.S. dollar for the high prices. Oil is bought and sold in dollars, and the recent decline in the dollar's value has caused the nominal price for oil to increase.

OPEC President Purnomo Yusgiantoro told reporters that "crude markets remain more than well-supplied" and argued that a failure to follow through on the planned cut would "bring the prices into crash" because of increasing inventories.

"The trend that we have now is unusual: in the crude, we have enough stocks, but in the product (markets), it's very tight," Purnomo said.

Futures markets, which rose sharply Tuesday on signals that OPEC would lower its output ceiling, responded to the official announcement with a sell-off as traders liquidated their long contracts and took profits.

U.S. crude futures for May delivery fell 49 cents to $35.76 per barrel in New York, while May contracts of North Sea Brent settled 77 cents lower at $31.51 in London.

However, some analysts argued that prices would soon begin to rise again, especially if OPEC showed that it was determined to curtail its actual output and not just reduce its production target. U.S. crude could spike to $40 a barrel "within a week or two," Carl Larry, an analyst at ABN Amro in New York, said.

U.S. gasoline prices would stay high and might rise even higher, said Kevin Norrish, head of commodities research at Barclays Capital in London. The main problem wasn't expensive crude so much as limited refinery capacity. "They're not able to process the crude oil into gasoline quickly enough," he said.

Costlier crude would have a "much more muted" effect on gasoline prices in Europe, where taxes account for the bulk of the pump price in some countries, Norrish said.

Over the longer term, the expected drop in demand during the April-June quarter and quota-busting by individual OPEC members should help gradually decrease prices, analysts said.

Most OPEC members are taking advantage of the current high prices by pumping as much oil as they can. Excluding Iraq, which doesn't participate in the group's quota agreements, OPEC was exceeding its previous target by an estimated 1.5 million barrels.

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AP Business Writer Bruce Stanley in London contributed to this story.

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