Oil prices likely to drift until recovery picks up in second half of year, energy watchdog says

Friday, February 8th 2002, 12:00 am
By: News On 6

LONDON (AP) _ Soft demand and a mild winter in major oil markets have offset the impact of cuts in crude production and kept prices for oil and refined products from rising, a respected survey said Friday.

Due to conflicting market forces, pressure for a substantial increase in crude prices probably won't build until an incipient economic recovery picks up during the second half of the year, the International Energy Agency said.

In fact, prices might fall before then. IEA statistics suggest that Russia, the world's second-biggest oil producer, isn't cooperating with OPEC's strategy to squeeze crude supplies, and an OPEC official expressed fears Friday of a possible rupture in relations between Russia and the producers' cartel.

The official, speaking on condition of anonymity from OPEC's headquarters in Vienna, Austria, said he didn't expect Russia's cooperation, such as it is, to last beyond March. OPEC is therefore likely to face a severe test this spring in trying to avoid a supply glut and even a damaging price war, he said.

Global demand for oil fell to 76.3 million barrels a day during the last quarter of 2001, down half a million barrels a day compared to the same three months of the previous year. Average demand growth for the full year was the lowest since 1985, the agency said in its monthly oil market report.

The global economic slowdown was largely to blame, together with unseasonably warm weather in North America and parts of Europe.

Members of the Organization of Petroleum Exporting Countries have tried to shore up weak crude prices by coordinating output cuts together with Russia and four other non-OPEC producers.

The cuts took effect Jan. 1 and shaved 510,000 barrels a day from world oil production, which slipped to 76.3 million barrels a day in January, the report said.

Although prices firmed up somewhat late last month, they stayed within the same broad range seen since November. The IEA said it doesn't foresee a major change in oil markets until a widely expected economic recovery picks up in the third quarter.

The Paris-based IEA is the energy watchdog for the Organization for Economic Cooperation and Development, a group of rich oil-importing nations.

Peter Gignoux, head of the petroleum desk at Salomon Smith Barney in London, agreed with the IEA that oil prices should remain relatively stable until demand recovers.

``I think prices are caught in a vice-like range,'' of $18-$22 a barrel for U.S. light, sweet crude, he said.

Crude oil for March delivery rose 54 cents to $20.18 in afternoon trading Friday on the New York Mercantile Exchange.

The report noted that nine of the 10 OPEC countries that agreed to cut their oil production on Jan. 1 actually did so. However, even after reducing output, OPEC members still were pumping 6 percent, or 1.3 million barrels a day, above their new quotas.

The OPEC official in Vienna challenged the IEA's statistics but conceded that if they are correct, then OPEC is doing a disastrous job at managing its own production.

Gignoux argued that OPEC's limited success in decreasing output last month is impressive nonetheless. In a series of incremental cuts, the cartel has pared back its production by more than 3 million barrels a day since January 2001.

``This is an aggressive act by OPEC,'' Gignoux said. ``They're cutting their own revenues.''