Tightened Supply, Severe Winter Could Drive Oil Even Higher

Oil importers last week were facing the prospect of a severe winter price spike as OPEC exporters prepared to turn the screw on stringent supply restrictions. Benchmark Brent crude in London struck new 31-month highs last week at $22.30 barrel -- another 32 cent rise on top of Tuesday's 60 cent jump which took prices above $22 for the first time since February 1997. "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 London's Energy Market Consultants. "The latest price rise is certainly a vote of confidence in OPEC compliance with its output cuts," said Peter Gignoux, head of the London energy desk at brokers Salomon Smith Barney. OPEC officials week have made it clear that there is no prospect the cartel will vote for an early easing of the export limits they adopted in March to lift prices from 22-year lows. Kuwait's Oil Minister Sheikh Saud Nasser al-Sabah said last Tuesday there were no plans yet for ministers, who meet in Vienna on September 22, to review the output cuts before next March. Yet many analysts are convinced that extra supplies are needed soon if prices aren't going to threaten post-Gulf War highs of $25 a barrel. Stocks are the Key Analysts are predicting further price gains because production curbs mean there will be a large gap between supply and demand in the approach to winter. Commercial oil stockpiles, at record levels only a year ago, are expected to drain so quickly over the next few months that inventories will have fallen to multi-year lows. "At the moment the figures point to a winter stockdraw so enormous it will push stocks down to the lowest levels of 1996," said Nick Antill of Morgan Stanley Dean Witter. "The question OPEC has to ask is does it want to do that?" OPEC ministers, who earlier this year said they wanted to avoid pushing prices too high, now insist there is no prospect of last year's surplus stockpiles being eliminated soon. But Energy Market Consultants, which specializes in projecting forward inventory movements, expects any excess against the normal levels of 1997 to have disappeared by the end of September. It is projecting that stock cover in the industrialized nations of the OECD will have fallen from 60 days of forward supply at the end of July to just 55 days by the end of November. OPEC insiders think the cartel, trying to repair some of the damage of last year's price slump, is content with current oil prices but may consider some action if they go much higher. "In this kind of price bracket OPEC is happy and no one will want to rock the boat. It's when prices get to $23-25 a barrel like in 1997 that there may be some movement," said one OPEC delegate. "There is little likelihood of raising production in September, but a significant chance they will as the turn of the year or early next year," said Antill at Morgan Stanley.