‘Oil Price May Fall to $40 a Barrel by Mid-2007’

RIYADH, 22 September 2006 — World oil prices could drop to as low as $40 a barrel by mid-2007 over receding geopolitical concerns but a collapse to pre-2003 prices is ruled out, OPEC’s former acting secretary general said yesterday. “It is very difficult for me to think of prices sliding to pre-2003 levels. We are talking about perhaps $40, $50 or $60,” Adnan Shihab Eldin told AFP in an interview.

Strong fundamentals of supply and demand, which underwent a dramatic change over the past three years, will continue to support a price of between $40 and $60 a barrel and may be higher, Eldin said. “It’s possible that the price may dip to $40, but not this year, maybe in 2007 and 2008,” depending on geopolitical conflicts, said Eldin, now a top contender for the post of OPEC secretary general.

The current price swings, Eldin said, were mainly due to geopolitical factors, such as the crisis over Iran’s nuclear program, Iraq and Middle East tension. “During the past few weeks, prices dropped 20 percent although the market fundamentals remained unchanged... Prices are moderating because the fear factor has receded.”

The fear factor accounts for between $10 and $20 of the price, said Eldin, who was acting secretary general under Kuwait’s presidency of OPEC until the end of last year.

Oil prices, which have tripled over the past three years, dipped briefly below $60 on Wednesday, a six-month low, before recovering some ground in Asian trade yesterday. Oil prices have fallen 22 percent since the July record of $78.40 on fears of supply disruptions in the Middle East.

The Organization of the Petroleum Exporting Countries “should continue to closely monitor the market ... It should create a balance between hike in spare capacity ... and how much of it should be pumped to the market,” Eldin said.

OPEC could face some difficult days next year when some two million barrels a day of additional production by non-OPEC oil producers will enter the market, he said. “This would require OPEC to take decisions with regards to the production ceiling and how much of its spare capacity should be introduced to the market. I think such decisions must be taken by the second quarter next year.”

OPEC on Sept. 12 maintained its production quota at 28 million barrels per day (bpd) despite weaker oil prices.

Eldin said that the mid to long-term future for OPEC members is very promising as almost all the increase in the crude supplies in the post-2012 will come from OPEC countries. “From now until 2012, non-OPEC and OPEC producers will equally share the increase in production, but after that it will be only OPEC producers who will provide any output increase,” he said. Fundamentals of supply and demand will continue to play a very crucial role in preventing oil prices from collapsing, he said.

In the past three years, 80 percent of the growth in demand came from China, Asia and other developing nations, not from the industrialized countries, he said. This will continue for decades to come.

On the other hand, supply fundamentals have also changed in which OPEC now plays a central role in providing any additional supplies, contrary to the formula in the past when non-OPEC producers played an important role. “These two major structural changes will continue to support oil prices in the long-term,” Eldin said.