EIU says oil prices not likely to hit US $80

Oil prices are not likely to triple to US $80 a barrel during the first quarter of next year or strangle the world economy should a U.S. attack on Iraq take place, the Economist Intelligence Unit says.

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By  Massoud Derhally Published  November 13, 2002

The world economy is in the doldrums and as the risk of war in the Middle East grows, so does the speculation and uncertainty. Despite recent news reports that the price of oil hinges on the likelihood of an all out American lead attack on Iraq, analysts and bankers see only a minor disruption in the world's oil supply.

Oil prices are not likely to triple to US $80 a barrel during the first quarter of next year or strangle the world economy should a U.S. attack on Iraq take place, says the Economist Intelligence Unit.

Simon Williams, deputy head and senior economist of the Economist Intelligence Unit in London says, while the political risk premium rises and tensions rise, oil prices will increase, "but not over US $40, and only for a very short time, a matter of days. We would then expect prices to cool, staying in the highs of US$20 a barrel to US$30 a barrel until the conflict reaches its conclusion and slide further in the following period."

"All you need is US $40 oil to bring the economy to a complete standstill. If we have $80 oil we're going to be in the hole," said Adam Sieminski, global oil strategist at Deutsche Bank told Reuters yesterday (Nov 12).

EIU's forecasts are based on the belief that oil market fundamentals are essentially weak, at the moment. "Demand growth is very slow, stocks are high, OPEC discipline is weak and non-OPEC supply is still picking up," says Williams.

The removal of Iraqi oil from the market will have a limited impact on price, and not only could, but almost certainly would be readily replaced by other OPEC producers, says Williams. OPEC members supply about 41 percent of the world's crude oil and that means there is more oil available in the world market than there otherwise might be.

"Even if Iraqi fields were badly damaged and thus taken off stream for 2003 and much of 2004, there is ample capacity to fill the gap. I think any discussion of oil at US$80 a barrel is redundant. It could only happen if there was to be an Arab oil boycott, which simply isn't going to occur," he added.

A senior Western banker at one of the top 3 banks in Saudi Arabia believes the fear is that ships involved in commerce in the Arabian Peninsula would have difficulty obtaining insurance. "If that happens then the world's oil supplies slow dramatically and you wouldn’t be able to have a compensatory uplift in oil production in Venezuela or anywhere else and the demand for oil would far outstrip supply and you would have a massive rise in the oil price," the banker told Arabian Business.

The EIU estimates that foreign investment flows into the gulf region (especially outside the oil sector) are likely to slow significantly next year. Williams says, "Efforts to develop the tourism industry are also likely to be negatively affected, although by 2004 you should begin to see the start of a fairly rapid recovery."

Oil prices slumped at the close of market (Nov 13) as Iraq said it would accept the UN resolution and allow inspectors back into Baghdad. International benchmark Brent crude oil fell from US $22.70 a barrel to US $1.02, the lowest level since March 2002 and U.S. crude futures on the NYMEX slipped 67 cents to $25.23 a barrel.

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