Freddie Mac gets lawsuit warning from SEC


By Brad Foss
Associated Press
Friday, August 13, 2004

WASHINGTON -- With so much uncertainty roiling
oil markets these days, analysts say one thing is
clear: The world's supply cushion is perilously thin.

Whether the amount of extra fuel that could be
pumped in a pinch is 1 million barrels a day, as
many believe, or significantly more than that doesn't
really matter, they say, because the amount of
actual production at risk these days is even greater.

As a result, the threat of output disruptions in Iraq,
Russia, Venezuela, and beyond has thrust crude
futures above $46 a barrel for the first time the
latest run-up coming even after Saudi Arabia offered
the market all it had. If global demand continues to
rise at current rates, don't expect cheap prices
any time soon, analysts said.

On Friday the price of crude for September delivery
surged to $46.58 a barrel on the New York Mercantile
Exchange, a rise of $1.08. That is crude's highest
Nymex settlement on record, although on an
inflation-adjusted basis it is still about $11 below the
price leading to the first Gulf War.

In the past, a comfortable surplus of available output,
or capacity, could be depended on to temper the
blow that geopolitical fears might have on oil
markets, said Lawrence J. Goldstein, president of
PIRA Energy Group in New York.

"But today all uncertainties must be immediately
factored into the price," Goldstein said. "We simply
don't have the cushion anymore."

Sure, there is no literal shortage of oil right now and
prices would likely decline if the threat of sabotage
against Iraqi oil infrastructure waned and the dispute
between the Russian government and oil-giant
Yukos gets resolved in a way that values the
company's assets fairly.

But that would still leave oil markets vulnerable to
other geopolitical flare-ups, analysts said,
explaining why futures are trading above $40
through the end of next summer and many believe
the $50 level will be reached before then.

What changed, experts said, is that private and
state-owned oil companies became cautious about
oversupplying the market after prices collapsed in
the early 1980s. The more circumspect approach
to exploration and production, however, has
allowed the capacity buffer to shrink and put the
industry in a position where it must struggle just
to keep up with rising demand.

"It's a problem that is at least a decade in the
making," Goldstein said. "So it's not going to be
solved in 10 days, 10 weeks or 10 months. It's
going to take years."

Depending on whom you ask, the world has
anywhere from 500,000 to 1.5 million barrels a
day of spare capacity the bulk of it in Saudi
Arabia that could be tapped instantly to offset
a temporary loss of supply.

"This is an exceptionally low ratio for an 81.4
million-barrel-per-day supply system and is well
below the 10-year average of 5.0 million barrels
per day," notes A.G. Edwards senior oil analyst
L. Bruce Lanni.

And it helps to explain why this week's attempt
by Saudi Arabia to calm markets was ineffective.

The Saudis said they were willing to put on the
market an additional 1.3 million barrels per day,
virtually all the country's available production. But
for many experts that served only to highlight the
market's supply limits.

"They are getting very close to capacity levels,"
said Marshall Steeves, an energy analyst at the
New York-based research firm Refco. "If demand
keeps expanding, what are we going to be doing
at end of the year?"

Robert Ebel, director of the energy program at the
Center for Strategic and International Studies in
Washington, attributed the latest price surge to
the fact that "there are a lot more trouble spots
out there than we are normally confronted with,"
including terrorist attacks in May and June
against oil workers in Saudi Arabia.

* Yukos, which pumps roughly 1.7 million barrels
a day, needs to pay the Russian government
$3.4 billion in back taxes. Its woes have prompted
worries that the efficiency of the company could
suffer in the next six months to a year as assets
are sold off and bankruptcy looms.

* In Iraq, output temporarily ceased this week as
loyalists of a radical Shiite cleric threatened to blow
up oil pipelines and port infrastructure. Iraq exports
roughly 1.8 million barrels a day through the
southern port of Basra.

* Add to the mix the persistent fear of political and
labor unrest in Nigeria (2.4 million barrels a day) and
Venezuela (2.2 million barrels a day), and the sheer
complexity of the situation becomes dizzying, even
for veteran energy traders.

Indeed, the list of politically unstable oil-producing
nations has always been long. But what especially
unnerved oil traders in recent months was the speed
with which the world's oil appetite grew, even with
higher prices.

The International Energy Agency, a Paris-based
industry watchdog, said this week that it expects
global demand to rise by 3.2 percent, or 2.5 million
barrels a day, in 2004 more than double its
original estimate.

Some analysts also point to the dwindling levels of
oil kept in storage in the United States as an area
of growing concern. The supply of commercially
available crude on any given day has fallen by
about 15 percent over the past decade in spite of
steadily rising demand.

But others say the situation is nothing to worry
about as advances in information technology and
logistics have enabled the oil industry like much
of the U.S. economy to operate efficiently with
less inventory.

"This is a genuinely tight market," said Leonidas
Drollas, chief economist of the Center for Global
Energy Studies in London, downplaying the role
of hedge funds and other speculative investors in
driving prices higher.

However, over the next 12 months he expects high
prices to cause demand to taper off and production
to increase.

"That's the classic response of the market," Drollas
said. "Prices will weaken."


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