Report: Oil prices fall due to more OPEC crude, warm winter

Posted: Tuesday, April 11, 2000

LONDON (AP) -- Increased OPEC oil production and a mild winter that eased consumer demand for heating oil are contributing to at least temporary relief from painfully high crude prices, a respected industry study said Tuesday.

Oil prices have fallen since OPEC members agreed last month to open the spigots on exports, adding 500,000 new barrels per day and giving refineries an incentive to buy more of the oil they need to make gasoline, the International Energy Agency reported.

However, any relief at the pump for motorists in oil-importing nations could be brief, the study said. The agency said even more oil will be needed later this year, during the peak driving season in industrialized nations.

''The second half of the year will need to see higher production,'' the IEA said bluntly. The Paris-based IEA is part of the Organization for Economic Cooperation and Development, a group of the world's wealthiest countries.

''It's a step in the right direction, but it's only a first step,'' said Julian Lee, an analyst at the Center for Global Energy Studies in London.

For the time being, gasoline prices in the United States have started to fall in anticipation of more OPEC oil reaching refiners. The average price at the pump for all grades of gasoline dipped nearly 2 1/2 cents per gallon during the past two weeks to just over $1.57, according to the latest Lundberg Survey of 10,000 stations nationwide.

U.S. oil companies have been under pressure to pass along any savings. Following OPEC's March 28 decision to boost production, President Clinton urged the companies ''to do everything they can to bring the savings to consumers as quickly as possible.''

On Tuesday, U.S. Energy Secretary Bill Richardson reiterated in a speech and congressional testimony that regular gas alone had peaked at $1.53 a gallon and would likely retreat to around $1.39 by Labor Day.

But the international report Tuesday warned that it will take even more oil production to hold down prices in the second half of this year.

Demand for gasoline in the United States, Europe and Japan will likely soak up any additional oil brought to market, the study predicted, adding that an additional 1 million daily barrels would be needed in the third quarter to satisfy the thirst of drivers and to rebuild refiners' inventories.

Oil prices were rising Tuesday in futures markets after sinking to five-month lows on Monday.

OPEC production cuts in 1999 had sent crude oil prices tripling over the past year to the highest level since the Gulf War. Prices have been coming down for about a month as it became clear OPEC would undo the production cuts it made in March 1999.

West Texas Intermediate crude for May delivery fell Monday to $23.85 a barrel on the New York Mercantile Exchange -- down 31 percent from its March 8 intraday peak of $34.37 a barrel. In trading Tuesday, the benchmark U.S. blend rose 29 cents to close at $24.14 a barrel.

North Sea Brent crude rose to $21.67 a barrel in late trading Tuesday on the International Petroleum Exchange in London, a gain of 37 cents. On Monday, Brent slumped $1.28 to close at $21.30.

''Over the last month, the prospects for oil markets have begun to look better for both consumers and producers,'' the IEA said.

Warm weather in the first quarter of the year and larger than expected supplies from non-OPEC sources meant that global oil inventories dropped by much less than the agency had anticipated.

Demand for oil eased to 76.2 million barrels per day during the first quarter, the IEA reported, down 0.8 percent from the last three months of 1999. Global supplies rose 1.1 percent to 75.1 million barrels over the same period, it said.

Refiners are once again finding it profitable to increase production, and the IEA forecast that inventories would rise substantially in the second quarter.

Clouding the horizon is the sharp rise in expected demand for gasoline this summer, when large numbers of Western motorists take to the roads.

Lee predicted that Brent prices would creep up to about $25 a barrel by May, as refineries gear up their production.

If Brent prices are to stabilize at $20-$21 a barrel, the world needs to see an additional 1 million barrels of crude each day, he said.

OPEC members are raising their output by an estimated 1.72 million barrels per day. But the increase actually is closer to 500,000 new barrels a day because OPEC members already were pumping 1.2 million barrels above their official quotas.

This cheating worsened ahead of the March meeting in Vienna, Austria, of the Organization of Petroleum Exporting Countries with the group complying with only 66 percent of its earlier output cuts, according to the IEA. OPEC's compliance rate was 72 percent in February.

Although non-OPEC producers Mexico and Norway have also boosted production, any additional oil to satisfy demand later this year would have to come from OPEC, Lee said.

OPEC members will meet again June 21 to assess whether they need to increase production further.

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