• ACI Russia

08/11/1998 13:08:10 FOCUS-World oil prices slump to fresh 10-year low

By William Maclean

LONDON, Aug 11 (Reuters) - Sickly oil markets bullied by

oversupply sank to fresh 10-year lows on Tuesday, undermining

OPEC's attempts to choke output and ratchet prices higher.

Global benchmark Brent crude was trading six cents weaker at

its session low of $11.85 a barrel at 1221 GMT, below a previous

10-year floor of $11.90 set in March.

Brent, the benchmark for much of the world's crude exports,

slid a sharp 68 cents on Monday under pressure from a

mountainous glut of crude and products.

The real price of the lifeblood of industrial economies has

not been this cheap for 25 years while its nominal value is

marooned at 40 percent below last year's average.

The fall has hit economic growth among members of the

Organisation of the Petroleum Exporting Countries (OPEC) despite

two rounds of output cuts by the cartel aimed at shaving world

supply by more than three percent.

The slide promises to pressure share prices of major oil

companies and delivered a hammer blow to non-OPEC Russia,

heavily dependent on commodity prices and struggling to meet

debt repayments while seeking foreign investment.

Analysts say Russian producers must now cut output, close

wells producing at a loss or undertake serious cost-cutting to

weather the price crisis.

A Gulf oil economist said it was too early to contemplate

holding an emergency OPEC meeting to discuss a fresh round of

cuts. He argued that OPEC's so far poor adherence to mandated

cuts would improve in August and September and lift prices.

But traders said OPEC's indifferent output reductions showed

it did not appreciate how long it would take to draw down the

crude and product stocks overhanginging the market.

"We really are at a very desperate situation in regards to

OPEC," said Russell Hill of Austrian oil company OMW.

He said it could take four months to bring stocks to more

normal levels if OPEC's cutbacks continued at the current

unimpressive pace of less than two-third of pledges.

"The time horizon issue is important because four months is

too far ahead for the market to get excited about," said Hill.

"And the compliance factor has diluted the evidence to the


Beleaguered OPEC and non-member producers have pledged three

million barrels per day (bpd) of cuts so far in 1998 but stocks

are so big that it could take months to drain them appreciably.

The spectre of a long glut stems from the price structure of

a bear market that encourages companies to buy oil for storage,

eventually turning an overhang of crude into a glut of products.

Bulging stocks at all-time highs now are denting refinery

profit margins, prompting refiners to chop throughputs thereby

shrinking the market for crude.

Crude stocks have been racing higher all year on increases

in Iraqi exports, poor Asian demand and a 10 pecent hike in

OPEC's production ceiling at the start of the year.

London brokers GNI said that neither renewed confrontation

between the United Nations and Iraq nor bombings of U.S.

embassies in East Africa were likely to support the market.

"The reality is that neither of these two issues is likely

to seriously interrupt the world supply of oil in the near

term," the GNI Energy Report said.

GNI and other analysts say relief for prices could come only

from strict compliance with OPEC output cuts and a very cold

northern hemisphere winter which would hike heating oil demand.

Brent crashed on Monday under the impact of rapid losses on

U.S. oil product contracts on the New York Mercantile Exchange

triggered by brimming stocks in the world's biggest energy


Prices in dollars per barrel:

Aug 11 Aug 10

(1221 GMT) (close)

IPE September Brent 11.85 11.91

NYMEX September light crude 12.96 13.05

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