Oil slides on OPEC, SARS

Prices drop to fresh 5-month lows amid fears of slumping global demand and impact of SARS epidemic.

April 29, 2003: 3:50 PM EDT

NEW YORK (Reuters) - Oil prices fell to fresh five-month lows Tuesday on expectations of rising spare supply in a weak global economy, where the deadly SARS epidemic is biting into energy demand.

Light crude oil for June delivery fell 25 cents to $25.27 a barrel on the New York Mercantile Exchange, coming within 20 cents of the lowest level in 11 months, after losing 20 percent in the past week.

In London, Brent crude fell 26 cents to $23.24 a barrel.

Prices have fallen for the last six sessions after the OPEC cartel last week cut back less than expected of the extra crude it pumped to cover supply during the U.S.-led war on Iraq.

While OPEC presented its deal as a cut of 2 million barrels per day (bpd), analysts said its threshold for the reduction was inflated, reducing the actual impact of the move.

"The market is still living through the aftermath of the OPEC meeting. It is surprised and disappointed with OPEC's decision," Societe Generale analyst Frederic Laserre said. "Now everyone is looking to see if U.S. crude stocks have risen again -- that will confirm the trend of a stock build and show that there is indeed a lot of oil out there."

Oil stocks in the United States, the world's largest consumer, have risen for two consecutive weeks. Analysts predict that new data Wednesday will show they rose again last week, pumped up by strong imports from OPEC.

OPEC raised production well beyond formal quota limits in March to keep oil prices under control ahead of war in Iraq and make up for supply disruptions from a strike in Venezuela and ethnic strife in Nigeria.

Helping weak economies

The increased OPEC supply, particularly from Saudi Arabia, has helped bring oil prices below the $30 a barrel level that analysts warn can hurt global economic growth.

"A period of moderate prices would be very helpful for the world economy," said Jean-Phillippe Cotis with the Organization for Economic Co-operation and Development (OECD).

Also weighing on prices, the International Energy Agency has said it may have to cut its world oil demand forecast for this year as the deadly SARS virus combines with other factors to hit economic growth.

OPEC has said it expected Severe Acute Respiratory Syndrome to hit Asian demand alone by some 300,000 bpd mainly due to declining air travel. The epidemic coincides with the second quarter, when oil demand falls about 2 million bpd from its winter peaks.

"SARS is one of the elements contributing to the fact demand is not very, very high in general. Economic growth and therefore consumption are not as strong as it might be," IEA Executive Director Claude Mandil said Monday.

Weekly air traffic data released Tuesday showed that European airlines had seen demand for seats to the Far East plunge by almost a third from week-ago levels. Asia's Singapore Airlines has cut capacity as much as 10 percent.

"We are now entering the secondary effect phase of SARS when we see a slowdown in the overall economy and less industrial production," said Societe Generale's Laserre.