Oil prices hauled back from highs

OIL prices look to have peaked after a dramatic price slump triggered by signs that supplies are more readily available and depleted oil stocks are recovering.

The January Brent crude futures contract is trading below $40 a barrel - sharply down from last Tuesday's high of $46.70 and almost 25% off the $51-plus records the front-month contract chalked up in late October.

Analysts say oil demand growth in China has eased slightly, putting less strain on the global supply system and allowing stocks to build at a time when Opec, headed by Purnomo Yusgiantoro, has been pumping out oil at its highest level for 25 years. Recent data show US stocks are rising, easing concerns about the availability of winter fuels, while markets have also taken heart from indications from Opec that cartel chiefs will stick to current official output limits when they meet in Cairo this week.

Some analysts claim last week's price slide was overdone, arguing that market fundamentals - healthy demand and fragile supply - remain broadly unchanged. But Deutsche Bank analyst Adam Sieminski believes that, at about $40, Brent is more realistically priced than when it topped $50 - the result of a 'strong emotional reaction' to unstable market conditions, as infrastructure sabotage depressed Iraqi output and hurricanes curbed Gulf of Mexico oil flows.

Deutsche expects Brent to hover around $40 in the first quarter of 2005 but predicts prices may slide to between $30 and $35 in mid-year if, as seems probable, stocks continue to build and spare world production capacity increases. Consultant Wood Mackenzie says there is evidence that Opec's spare capacity is growing and that increasing volumes of the light, sweet crudes especially popular with refiners are finding their way to market.

Opec kingpin Saudi Arabia has unveiled plans to lift capacity to 12.5m barrels a day from the present 11m - a target Deutsche reckons it will take two or three years to reach.

However, Barclays Capital analyst Kevin Norrish sounded a note of caution. 'We are nowhere near the peak for winter demand for heating oil,' he said. 'The crude-supply picture has also deteriorated in the last few days.'

November exports from Iraq were the lowest they have been this year and in Norway about 200,000 barrels a day of output is shut in because of a gas leak. Further major supply disruptions could change the picture again.

Washington-based think-tank PFC Energy says that prices will probably stay high in the short term. Although a US currency crisis would sap American and world demand, most indicators are bullish - global demand remains strong, key producers are vulnerable to sudden supply outages, and deteriorating relations between the US and Iran threaten to add another sinister dimension to Middle East tensions.