Oil Seen Slumping in Second Half 2003

asia.reuters.com Sun February 23, 2003 09:38 AM ET By Neil Chatterjee

LONDON (Reuters) - World oil prices now near two-year highs are set to slide 30 percent in the second half of the year after any U.S.-led war on Iraq, a Reuters poll found.

The survey of 14 oil analysts and consultants, undertaken on Feb. 10-21, projects prices dropping nearly $10 to $22.46 a barrel in the second half of 2003, from $32 a barrel now.

It forecasts $27.53 a barrel for the first half of the year and gives a 2003 average of $24.30, down from $25.03 in 2002. Brent so far this year has averaged $30.98, forcing many analysts to revise forecasts higher.

Prices are expected to slump in the second half after being boosted in recent months by a strike in Venezuela and fears of an attack on Baghdad.

"Once war is over, it will come down pretty sharpish, and Venezuela will be less of a factor," said Matthew Parry of the Economist Intelligence Unit.

Analysts expect prices to slide after a short war in the next few months, a projection which, if borne out, would provide a welcome stimulus to a world economy struggling for growth as energy costs stay high.

"Most people are working on the basis of a big slide later on -- the economic impact will be beneficial," said John Waterlow of consultants Wood Mackenzie.

"The economy needs something to give it a boost -- the simplest way is an oil price drop."

Finance ministers from the Group of Seven wealthiest nations met in Paris on Friday to discuss what can be done to stop the rot in the global economy, following a poor set of U.S. economic data on Thursday.

Economists estimate every $10-a-barrel rise in oil over a year cuts world growth by 0.5 percentage points.

Oil prices have spiralled on worries that conflict with Iraq could spread in the Middle East, which supplies around one third of the world's oil.

First quarter prices have also been boosted by the prolonged strike in Venezuela, which has slashed oil shipments from the world's fifth biggest exporter.

Analysts have upped their price forecasts for the year by about $1.50 a barrel, over six percent, in the past month as the 11-week-old strike helped reduce U.S. crude inventories to 27-year lows.

"The Venezuela strike has tightened stocks considerably, and there'll be a need for stock building in the second quarter," said analyst Lawrence Eagles of brokers GNI-Man.

The U.S. Energy Information Administration said this month that it expected U.S. crude oil to stay above $30 a barrel for the rest of the year, though most analysts see oversupply by the fourth quarter.

OPEC COMPLIANCE?

Oil demand growth will be too sluggish to cope with the increased supply once Venezuelan production recovers and Iraqi output resumes after a war, they said, while non-OPEC countries' output is also on the up.

Differences in second half price forecasts depended on the extent to which oil cartel OPEC could control its production limits.

"We think there will be a significant fall off because of new capacity from the likes of Algeria and Nigeria, which will put increasing strain on OPEC cohesion," said Richard Savage of Bank of America.

"We think it will be higher for longer -- our view is that OPEC can control prices between $22-$28 in the medium term," said an analyst at another bank, which revised its figures upwards this week.