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The Wall Street Journal: Oil Falls to $91 As Data Suggest Demand Shift

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The Wall Street Journal: Oil Falls to $91 As Data Suggest Demand Shift

By NEIL KING JR. in Riyadh, Saudi Arabia, and ANN DAVIS in Houston
November 14, 2007; Page A1

Early signs of an easing in global demand growth and swings by Wall Street traders are pushing oil away from the historic $100-a-barrel mark, at least for now.

After rising as high as $98.62 a barrel a week ago, the benchmark oil-futures price on the New York Mercantile Exchange hit a low of $90.13 yesterday before closing at $91.17, a one-day drop of $3.45.
 
Over the next few years, supplies are likely to be tight and demand is expected to keep rising. A security scare, cutoff in supply or shift in sentiment could send prices soaring again. But traders have begun taking into account other factors that could complicate the near-term outlook.

The International Energy Agency, the industrialized world’s energy watchdog, said yesterday it was lowering its prediction for global demand growth for the fourth quarter, easing fears of a short-term supply crunch. Meanwhile, some officials at the Organization of Petroleum Exporting Countries have said it may consider raising its production ceiling next month.

Wall Street’s speculators, who contributed to oil’s 49% rise since the beginning of the year, have shifted direction this week. Yesterday marked the expiration of a key deadline in the crude-oil options markets. As it became clear that oil wouldn’t hit $100 a barrel by the deadline, a chain reaction of selling ensued as traders unwound bets pegged to the risk of $100 oil.

In Riyadh, the de facto leader of OPEC, Saudi Arabian oil minister Ali Naimi, argued strenuously against “the pessimists,” who he said have driven up prices by predicting supply shortages as demand in emerging markets soars.

Repeating a frequent lament of oil-industry officials, Mr. Naimi told reporters, “The price today has really no reflection whatsoever with the fundamentals” of supply and demand.

Such statements have a political dimension. Saudi Arabian officials are eager to deflect the notion that they bear the blame for higher oil prices and need to boost output in response. Oil producers have stressed other factors such as the falling dollar, geopolitical jitters and market speculation.
 
Still, the International Energy Agency’s monthly report suggested the world’s oil supply-demand balance may have a little more give than initially thought. The IEA said it was lowering its prediction for global demand growth for the fourth quarter by 500,000 barrels a day, due mainly to signs of weakening demand in the U.S. and the countries of the former Soviet Union.

The IEA added that world oil supply rose in October by 1.4 million barrels a day. One surprise performer was Iraq, where output from its northern fields is expected this month to top 600,000 barrels a day, the highest level since the U.S. invaded Iraq in 2003. The agency noted increased production from Angola, a new OPEC member emerging as an important supplier of crude to the U.S.

OPEC countries supply around 40% of the world’s oil demand, which now runs at just over 85 million barrels a day. Demand for oil has continued to climb in the developing world, and it has held fairly steady in the West, despite soaring prices. But the IEA said “strong indications” are now emerging that “high prices are depressing demand” in industrialized countries.

This year, many Wall Street trading desks had sold options to investors, including hedge funds, to buy oil at $100 a barrel, according to a report by Lehman Brothers Holdings Inc. These investors were betting that oil would top the century mark and they could turn a profit by exercising the options. The closer oil crept to $100, the more investment banks had been buying oil to hedge the risk of losses on the contracts, Lehman contended.
 
Then, on Monday, oil opened sharply lower and stayed down, as traders digested the chance of an OPEC production rise and slowing fuel demand amid a shaky U.S. economy. Nearly a third of all options to buy crude at $100 on the New York Mercantile Exchange were set to expire yesterday, and it became clear that the options were likely to end up worthless. Suddenly, Wall Street firms didn’t have to buy oil as a hedge, says Lehman analyst Adam Robinson, and prices plunged.

Gasoline demand in the U.S. is still growing, but some data suggest the growth rate has slowed considerably. Department of Energy data show a four-week average of U.S. gasoline demand is growing at slightly less than 1% compared to year-earlier levels. In the 1990s, an era of inexpensive fuel, annual growth was more in the 4% to 5% range, says Citigroup Inc. energy analyst Tim Evans.

Willis Shaw Express, a trucking firm based in Elm Springs, Ark., that runs a fleet of 725 refrigerated trucks, has taken action since early this year to curb fuel use. “The No. 1 thing we’ve done to save fuel is cut back on the speed of our trucks,” says Chris Kozak, president.

The company has started using “governors” on its truck engines that limit them to a top speed of 65 miles an hour. While that may slow shipments somewhat, Mr. Kozak says the math makes sense. He estimates that when a truck reduces its speed by one mile per hour, it gains two-tenths of a mile per gallon in fuel economy.

Citigroup’s Mr. Evans says such reactions by fuel consumers could have been predicted. “All of the talk about $100 oil was really just a distraction away from the failure of the data to confirm the surge in demand that the bulls had been touting,” he says.

Gasoline prices at the pump are just now catching up with the sharp rise of oil prices in recent months, so this week’s drop by itself isn’t likely to bring relief to American consumers. High energy prices remain a big concern weighing on the U.S. economy.

Paul Horsnell, energy analyst with Barclays Capital, said Western demand is less relevant than growing demand in emerging markets. He also noted that third-quarter results from international oil companies show falling output, suggesting that sluggish supply is likely to continue pushing prices up. “We still think the average price…will be higher next year than this year,” he says.
 
Mr. Naimi has left open the possibility of OPEC raising its output ceiling next month, when the bloc’s ministers meet, but he ruled out any such discussion this week as OPEC heads of state are gathering in Riyadh for a summit. Algeria’s energy minister, Chakib Khelil, interviewed at an energy conference in Rome, doubted OPEC would act next month. “If we’re seeing slower demand now, that’s an argument for not increasing output,” he said.

U.S. Energy Secretary Samuel Bodman, speaking at the same conference, again called for OPEC to raise production. If demand for oil is slowing in the U.S., Mr. Bodman told reporters, “I haven’t seen it.”

Saudi Arabia is keen to use the media spotlight this week to drive home the point that it has plenty of oil to go around, and that its supplies aren’t dwindling, as some analysts have argued in recent years. The country’s national oil company, Aramco, has sponsored media tours to its headquarters in Dhahran, to a huge new petrochemical complex along the Red Sea, and to one of its longstanding oil fields, which the company is now looking to expand.

By far OPEC’s largest oil producer, Saudi Arabia now has around 11.3 million barrels a day in capacity. Mr. Naimi said that despite rising production costs, the country was on schedule to boost its capacity to 12.5 million barrels a day by 2009.

–Tim Aeppel, Guy Chazan and Peter Fritsch contributed to this article.

Write to Neil King Jr. at [email protected] and Ann Davis at [email protected] 

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