Oil's Run Is Likely to Keep Fast Clip

Price May Top $60 or More If Supplies Are Disrupted And Demand Fails to Cool

BHUSHAN BAHREE / Wall Street Journal 4mar2005

The big oil-price spike of 2004 looks increasingly likely to get a sequel.

As oil prices approached a new high yesterday, industry analysts said they are anticipating price increases to more than $60 a barrel this year. Some analysts are even beginning to talk of the possibility of greater increases -- to $75 or $80 a barrel -- in the event of a major supply disruption, unless red-hot demand for crude cools in Asia and the U.S.

Unlike last year, when rising prices sparked protests in the U.S. and elsewhere, opposition to the increase has become quieter as businesses and consumers have become accustomed to more expensive oil.

Yesterday, the acting secretary general of the Organization of Petroleum Exporting Countries, Adnan Shihab-Eldin, acknowledged in remarks to journalists the possibility of prices rising to greater levels if supplies are disrupted, suggesting the cartel believes it has a limited ability to curb world oil prices. Talk of a renewal of last year's run-up in prices comes as OPEC's energy ministers prepare to meet in Iran on March 16. While they could raise production quotas, OPEC already is pumping close to capacity.

U.S. benchmark oil shot above the previous settlement high of $55.17 a barrel in intraday trading on the New York Mercantile Exchange yesterday before retreating. Futures for April delivery settled at $53.57 a barrel, up 52 cents, after hitting as high as $55.20. On an inflation-adjusted basis, oil is still well below highs of about $90 reached in the early 1980s.

Like last year, growing world demand -- particularly from the U.S. and China -- underlies much of the price increase. The continued weakness of the dollar also has set the stage for increases, because oil is priced in dollars around the globe, and a weaker dollar means less revenue per barrel for oil producers.

The current surge in prices also comes amid realizations by OPEC nations and oil traders that higher prices have had a limited impact on world economic growth. While costlier energy has been a significant drag on relatively weak economies such as Japan and Germany, higher prices haven't been enough to derail recoveries in the U.S., China and other more-vigorous areas. With the world showing signs that it can withstand higher energy prices, there has been little evidence lately to suggest that either oil producers or big consumers are trying to cap the latest run-up.

"There is no fear of high oil prices," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "That's what scares me the most." He noted that Federal Reserve Chairman Alan Greenspan hadn't even brought up the issue of oil prices in Senate Budget Committee testimony on Wednesday.

Energy Secretary Samuel Bodman told a Senate panel yesterday that "the capability of any member of this government to influence the members of OPEC is limited." Mr. Bodman also suggested he had other priorities. "I have a lot on my plate," he told the Senate panel.

The current run-up still could further hurt those economically weak nations, as well as energy-sensitive industries such as airlines and auto makers. European Central Bank President Jean-Claude Trichet yesterday cited oil prices as one threat to economic growth.

The latest surge in prices was triggered by refinery shutdowns in the U.S. on Wednesday and a growing belief among many investors that OPEC isn't about to increase its production. Stockpiles of crude oil in the U.S. posted another increase this week, suggesting that OPEC wouldn't see a need to boost supplies when it meets this month. OPEC, led by Saudi Arabia, has made clear that its supply decisions are based in large part on making sure that inventories levels in major consuming countries don't rise.

As industry analysts pore over demand and supply numbers, they also realize that OPEC has very limited ability to intervene. This vulnerability in the global supply chain became evident last year, when OPEC was producing at nearly maximum capacity to meet demand. With demand continuing to rise this year, analysts reckon OPEC once again will be tested in the spring, as the U.S. driving season begins to use up large volumes of gasoline and as refiners struggle to keep up with demand for gasoline, diesel, jet fuel and other products elsewhere.

"I would not be surprised at all if prices spike past $60 [a barrel] in the third quarter, or in the next few weeks before the OPEC meeting," said Deborah White, an oil analyst at Société Générale in Paris.

Ms. White said the blow to consumers could be much heavier if there is a major crude-supply outage -- which she defined as two million barrels a day, about what Iraq produces on a good day -- or if 500,000 barrels a day of refinery capacity is lost. In such scenarios, "the sky is the limit," Ms. White said. "That means spikes to $75, $80 a barrel."

The world currently consumes more than 84 million barrels a day of oil. Rising overall demand and seasonal surges are expected to lead to global consumption of nearly 88 million barrels a day in the fourth quarter this year, a level of demand that refineries, making a whole slate of oil products, may be hard-pressed to meet. OPEC currently is producing 29 million barrels of oil every day, roughly a third of world supply.

Ms. White and other analysts figure OPEC has extra pumping capacity to replace only as much as one million to 1.5 million barrels a day of crude supply lost elsewhere because of accidents, strikes, wars or other reasons.

--Maya Jackson Randall and Ana Campoy of Dow Jones Newswires contributed to this article.

Page A3