IFP advisor forecasts steadier crude prices

PARIS�Jean-Fran�s Giannesini, advisor to the chairman of France's Institut Fran�s du P�ole, Thursday predicted oil prices would stabilize in the near term within the Organization of Petroleum Exporting Countries' target price band.

Giannesini, speaking at IFP's Panorama conference, said the combination of a slowdown in global economic growth, greater quota compliance by OPEC nations, and E&P spending programs launched by Western oil companies before the 1998 price collapse would help steady oil prices this year.

"Although producing countries, consuming countries, oil majors, and smaller oil companies all want stable prices or a slight upturn at most, most agree that it is difficult to achieve complete price stability by maintaining a balance between supply and demand," he said.

"At best, given the current market conditions, it might be possible to arrive at a situation that is macro-stable, but micro-unstable. In other words, to keep prices within a relatively broad range of $22-$28/bbl."

Giannesini said last year's overheated crude prices will, ironically, prove a stabilizing force in the coming months by cooling demand.

He said global economic growth is expected to be moderate in 2001-02, quoting International Energy Agency data that forecast a 2.5% growth in oil demand. "This is primarily because the eventual effect of high crude prices is to have a moderating effect."

Giannesini suggested the price-demand "acceptability threshold" was crossed when crude hit record highs in the summer, leading to consumers, albeit briefly, "to modify their habits," and governments to revive energy saving policies as inflation reared its head and economic growth slowed, especially in developing countries.

OPEC member states' willingness to "close ranks" and more tightly comply with consensual quota policy last year, Giannesini believes, is a landmark in the organization's internal relations that should pay further dividends globally in terms of price stability.

"The united front presented (by OPEC countries) marked a major success for the organization," he said. "If in the months to come OPEC obtains the same success in controlling prices and manages to keep them within its price band, it will be an event of major political and economic importance."

Giannesini compared the potential for such unification by OPEC states to the 1928 Achnacarry agreement that "paved the way for over 40 years of (oil) price stability."

Western oil companies' large international E&P spending programs slated before the 1998 oil price crash also will steady crude prices in the coming years with new streams of production.

"The large investments made in 1997 and 1998 (into exploration and production) should begin to bear fruit," he said. "Non-OPEC production, having stagnated for several years, is expected to start growing again. Last year we noted the positive effects of offshore development in the Gulf of Mexico. In 2001, the first giant fields discovered in great water depths off West Africa should come on stream. Such an increase in non-OPEC production would incontestably contribute to stabilization by giving OPEC leeway to maneuver," he said.

Giannesini warned, however, that the price of oil, having suffered the volatility of the past year, could easily be affected by several outstanding factors.

He said oil companies' use of "just in time" inventory practices increases price instability. He said the time lag between producing countries' response to price trends, "characterized by great inertia," and that of the crude market, where "reactions occur immediately," would continue to undermine stability.

Early last year IFP predicted an oil "price shock" would occur in 2002 due to a lack of crude production capacity. Giannesini said that may have been short-circuited by the price volatility of 2000, leading to two favorable outcomes.

"Demand could slacken due to price elasticity and slower economic growth," he said. "And OPEC countries could decide to boost capital expenditures to expand production capacity.

"Ultimately, if the biggest producers were to plow a substantial part of the surplus earnings generated by the large price hikes of the summer 2000 back into production capacity, and if a solution could found to the problem with Iraq, the threat (of price instability) would be greatly reduced."