Commodities and Derivatives: Oil price still in troubled waters

IN A MONTH or two, it seems likely, there will be an outbreak of outrage in the media. The target of wrath will be the oil companies, which once again will have failed to reduce petrol prices in the wake of a tumbling crude oil price.

At some point, after the outrage has died down, the cost of petrol will indeed fall. As the oilmen explain to anyone who will listen, there is a link between crude and petrol prices, but it is a loose one. Petrol and diesel are traded on their own markets in Rotterdam, and it is only in the long run that they follow the pattern of crude.

All this assumes crude prices will fall - not an obvious conclusion from the price graph of the past three months. They tumbled to their lowest level for five years after Opec ministers failed to agree a cut in output at the end of November, then kept heading down.

Around Christmas, Brent oil dropped below dollars 13 - in real terms not far from the dollars 8 level touched during the catastrophic 1986 price collapse. Since then, however, they have risen. Brent oil for delivery in March was trading at dollars 14.15 on Friday evening.

Peter Gignoux, director of Smith Barney Harris Upham in London, says this recovery is due to the weather. The eastern US has had its coldest winter for many years, pushing up demand for heating oil, while rough seas have hindered loading at North Sea terminals.

'They are the only reason a further decline has been forestalled,' he says. 'I see dollars 12 well within our sights, and possibly dollars 11 when the bad weather is behind us.'

This sounds like a familiar story. Mr Gignoux was a bear a year ago, and he was right. But the reasons for pessimism are not quite the same as they were then.

Last year the crisis was dominated by internal ructions in Opec. The two biggest producers, Saudi Arabia and Iran, accused each other of bad faith and were unwilling to cut production unless the other did.

Kuwait insisted on increasing production without restriction while the ghost at the banquet, Iraq, kept the markets nervous by signalling that it might agree to terms allowing it to restart exports.

Despite the squabbling, Opec members managed to show better discipline last month than for many moons. The cartel pumped just 75,000 barrels a day more than the ceiling it had set itself. The threat of Iraqi exports had receded - or been forgotten by the markets.

By then, however, another threat had been spotted in the choppy seas of the north. New figures from the International Energy Agency show that crude oil supplies may have exceeded market demand by 600,000 barrels a day in the last three months of 1993. Non-Opec production was 950,000 barrels higher than in the third quarter, with the North Sea pumping 570,000.

This increase in production was partly due to a recovery after the hiatus caused by the Piper Alpha disaster, but also reflected the fact that the North Sea was still regarded as an attractive 'province' for exploration.

Furthermore, all the oil companies had been cutting costs since 1986. Most developments were designed to be profitable with crude at dollars 13 a barrel. The threatened lower price, combined with changes in petroleum revenue tax, are likely to reduce exploration levels but will not cut absolute production.

Earlier this month the Omani oil minister visited non-Opec governments in an attempt to persuade them to cut production. They all said no. British officials had the perfect answer: 'It is nothing to do with us. Ask the companies.'

A year ago Opec could in theory have controlled the oil price. Non-Opec output was steady or falling. Now it will have not only to control its own urges, but counter the mavericks such as Britain and Norway.

That will be nigh on impossible. 'If you were a Saudi,' asks Peter Bogin, of Cambridge Energy Research Associates, 'would you cut your production by 500,000 barrels just to see the British increase theirs by the same amount?'

All this should eventually be good news for the car driver - but not for a while yet.

(Photograph omitted)