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Analysts: Global Oil Price to Stay High
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Although crude oil saw its biggest price drop since April 2005 in New York yesterday, a Chinese think tank predicted the average global oil price will swing to a comparatively high level this year.

Crude oil for February delivery dropped as much as US$2.21, or 3.9 percent, to $53.88 a barrel, as mild weather in the United States cut heating fuel demand and caused inventories to swell.

"Because of curbed demand, the crude price will see a slight drop this year. But the yearly average will stay high, keeping pressure on major Chinese oil-dependent industrial segments," said Niu Li, a senior analyst with the State Information Center (SIC), yesterday.

The SIC, under China's top economic planner the National Development and Reform Commission, said in a recent paper that the average global oil price for this year will fluctuate between US$55 and US$65 per barrel. The predicted average price is much lower than the peak of US$77.03 in 2006, but still lofty compared to previous years.

As the global oil price is subject not only to supply and demand, but uncertainties such as geopolitics and natural disasters, it is difficult to forecast. Many multinational research institutions and or-ganizations differ substantially in their outlook on this year's oil price.

"Despite the difficulty (in predicting the price), we do believe the global oil price is predictable by addressing supply and demand. Of course, such analysis is built on a relatively stable geopolitical and climate hypothesis," said Niu.

In terms of demand, the International Monetary Fund predicted the global economy growth momentum would slow from last year's 5.1 percent to 4.9 percent this year. The loss of growth momentum of major world economies such as the United States and Europe will reduce global demand for oil.

Niu also pointed out that the efforts of many countries to develop alternative energy resources will pay off this year, helping to reduce dependence on oil. And the current high oil price will fend off speculation because investors are crystal clear the high price is always accompanied by extra risk.

Although demand in 2007 will not be so robust as last year, the international oil price will not slump. Instead, according to the SIC report, there is good potential for a rebound because the oil supply will tighten as well.

Geopolitical risks still hover over the Middle East and require strengthened long-term efforts to dissolve. And controls on the oil industry have been tightened for major oil exporters such as Russia and Venezuela.

Moreover, since most of the spare global production capacity is under the control of the Organization of Petroleum Exporting Countries (OPEC), its decision to cut production will count in keeping the price high.

A veteran analyst from BP said it was unlikely there would be major ups and downs in the oil price this year.

"Oil production in Iraq is not expected to be resumed to full capacity in the short term and there are many uncertainties about oil supply from Iran and Nigeria. Based on these factors, the global supply of crude oil depends to a large extent on OPEC, which is in control of almost all the spare capacity and does not want the oil price to drop below US$55," said the BP analyst, who wished to remain anonymous.

Despite staying at a high level, the average oil price for 2007 is predicted to be slightly lower than that of 2006. That will certainly turn out to be a shot in the arm for the Chinese economy in terms of lowering the cost of crude exports. Theoretically speaking, the slight drop in the global oil price will also benefit enterprises and grassroots customers by cutting down on their oil expenditure, said Niu.

Since the domestic oil product price is not fully market-oriented and not in line with the global price, the benefits for Chinese businesspeople and ordinary customers may not show up instantly, said Niu.

Yang Weicai, deputy director of the China Petroleum and Chemical Industrial Association, said the 2007 oil price would not have a major impact on the chemicals industry.

"Because of the robust demand for chemical products in China, the high average price of crude will not squeeze the profit of the chemicals sector in a massive way," Yang said.

Cao Xiaoxi, chief engineer of the Sinopec Economic and Development Research Institute, said as long as production capacity still falls below demand, the extra cost of crude would not damage the chemicals sector substantially.

"Of course, the prices for major chemical products will stay high in line with the average global crude price," Cao said.

But the oil-refining business may continue to suffer from the high oil price, according to the SIC's Niu. "If the crude price is above US$60, the refining segment of China will lose money," he said.

Other sectors including transport, logistics, agriculture and fishery will also suffer from an oil price as high as US$60 per barrel.

"These sectors, involving massive oil consumption and the use of fertilizer, are vulnerable in the face of the high oil price," Niu said.

(China Daily January 10, 2007)

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