Oil price slump unlikely to shift
News Analysis: Today's Opec meeting will struggle to lift the industry's prospects, and rationalisations will continue
Wednesday 25 November 1998
Most experts believe there is little that Opec can do to affect the outlook for the industry. According to analysts, everyone will just to have to get used to lower prices, and lower profits.
The recent collapse in oil prices has been little short of spectacular. The price of Brent crude oil has more than halved since its 1996 peak of close to $25 a barrel. Yesterday, benchmark Brent crude oil was trading at around $11.25, close to a 12- year low.
According to John Battle, the UK energy minister: "There is now little or no margin between the cost of new production in the UK sector and the price of oil in the market."
Analysts say that there are three reasons for the recent price slump. First, the Asian financial crisis meant that world oil demand has been lower than expected.
"The Asian countries have in the past accounted for the majority of growth in oil demand," says Nigel Saperia at Bankers Trust.
Second, the mild winter did little to boost weak demand. Third, Opec made strategic errors - it increased oil production in November last year, just as the Asian economic crisis was staring to bite. "I don't think they [Opec] realised the severity of the situation in the Asian economies," says Mr Saperia.
The medium-term outlook for oil prices is little better. The recent build- up of stocks will continue to depress prices. Analysts at Salomon Smith Barney predict that world oil supply will exceed demand well into the year 2000. And recent technical changes mean that it is now far cheaper for oil companies to seek out new sources of supply. So even if prices were to rise, all this would do is prompt a flood of new supplies onto the market.
So a combination of substantial oil stocks and shifting technological fundamentals means that Opec is facing an uphill task. This task is made even more difficult by the structure of Opec itself. This once-powerful organisation controls well below 50 per cent of world supply. Even if it does agree production cuts, and its members stick to the agreement - heroic assumptions given Opec's track record - increases in supply by non-Opec producers mean the overall impact on oil prices may be negligible.
Little wonder, then, that the industry has little faith in the ability of Opec to shore up prices.
"It's going to take a lot of discipline and a lot of patience by Opec for us to see the [oil] price come up," says Sir John Browne, chief executive of BP.
"A market price is just that - a price which neither governments nor oil companies can control," says Mr Battle.
Preliminary indications are that the industry's scepticism about Opec is well-placed. Yesterday Gulf sources were saying that no new production cuts were likely to be agreed. At best, Opec might extend cuts in production agreed in the summer.
So, barring a crisis in the Gulf, there is little prospect of a major recovery in the oil price in the near future. Oil companies will simply have to get used to lower oil prices. Indeed, many have already started the adjustment process by rationalising capacity: BP and Amoco have joined forces in a $100bn merger; Shell is to cut 3,000 jobs; the recent merger of British Borneo and Enterprise Oil is expected to kick-start a wave of rationalisation among the independent oil exploration companies.
Government is also playing its part. Just last week, the Department for Trade and Industry set up task forces aimed at helping UK companies get production costs down. Companies have also been given a boost by the apparent Treasury climbdown on oil taxes.
However, both rationalisation and government initiatives are longer-term solutions to the problems posed by the falling oil price. In the short term, there seems little that anyone - Opec included - can do to prevent lower oil prices feeding straight through to the bottom line.
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