Oil price could be headed for collapse

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The Independent Online
THE OIL price could be heading for a 1986-style collapse, according to a leading analyst.

Peter Gignoux, a director of London-based Smith Barney Harris Upham, said that despite last week's 70c-a-barrel bounce in the price of crude, 'the components are in place for a good old-fashioned price slide'.

There will be further slippage during the winter, he predicted, with the market weakening sharply in the spring.

Mr Gignoux said that the high level of stocks in the US and Nigeria's use last week of 'netback' selling are both reminders of 1985/6, when the price of Brent crude collapsed from dollars 30 to less than dollars 10.

The netback arrangement means that Nigeria will be paid only after the refined product has been sold; and at a price linked to what it fetches. Because the refiner has no incentive to keep the price high, netbacks normally lead to weakness in the market. Although Nigerian officials have insisted that the sales were restricted to a small number of shipments, Mr Gignoux called it a dangerous precedent.

Brent for January delivery reached dollars 18.42 on Friday, having recovered sharply from an eight- month low of dollars 17.70 on Tuesday, but fell back to end the day at dollars 18.12. The rise was triggered by unrest in Russia, which exports 2 million barrels per day, combined with hopes that demand would be lifted by the first blizzards of the season in the north-eastern US.

January Brent is still more than dollars 2.50 below the price in early October. Most analysts think that there will have to be real turmoil in Russia before there is any fundamental move upwards.

The real weakness in the market comes from Opec's inability to restrict production. At their meeting earlier this month, oil ministers set quotas. But the market decided these were too high and were unlikely to be enforced. As a result, Mr Gignoux said, 'Opec is producing 1 million barrels a day more than it should'.

The 1986 collapse triggered a deep recession in oil-dependent regions. A fall now would not have as dramatic an effect, as the industry has increased efficiency.

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