-- Repeating story from earlier
By Stephen Parker
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Oil exporters are finding out it's getting harder to stretch a petrodollar.
With the falling value of the dollar - the currency in which oil is priced - exporters are seeing their buying power erode. To make up for those losses, exporters are likely to send more oil abroad, a move that could put downward pressure on prices, economists said.
"As the value of the dollar declines, the purchasing power of the oil producers' so-called petrodollars goes down along with it," said Nariman Behravesh, chief economist at DRI-WEFA Inc., a consultancy based in Lexington, Mass. "The temptation will be quite strong for producers to increase oil exports."
Waning investor confidence in U.S. corporations, falling stock prices and doubts about the strength of the U.S. economic recovery have all weighed on the dollar. The U.S. currency this week reached its lowest level against the yen since late September and its lowest point against the euro in 28 months. Since early April, the dollar has weakened by about 12% against both the yen and euro.
Projecting the weak dollar's impact on oil exports involves a number of variables including a country's economic health, its revenue targets and the sources of its imports, in addition to oil-market concerns like the level of demand. While economists said it's hard to pinpoint the precise effect, they nevertheless agree the likely result is more oil exports.
The dollar's decline will push up oil exports in the second half of the year, economists said. Some see a moderate impact, while others think the depreciating currency will give producers a strong incentive to send more oil to market.
Working against that influence will be producers' concerns about oversupplying the market at a time when prices remain relatively high despite questions about the outlook for the U.S. economy and, in turn, oil demand.
"We may have some increase in production," said Anthony Karydakis, senior financial economist at Banc One Capital Markets in Chicago. "But at the same time, they don't want to cause an oversupply in a mediocre oil-demand environment."
Overproduction Already Here
In a sign of the concern about weak demand, the Organization of Petroleum Exporting Countries agreed this week to leave its output quotas unchanged at their lowest level in a decade despite increasing competition for market share from independent producers.
Oil prices have settled into the middle of OPEC's targeted price range. But even before the dollar's recent slide, OPEC oil revenues had declined due to a sharp drop in oil prices last fall and OPEC's curbs on oil exports over the past year.
The group's oil export revenues for 2002 are projected to be $178 billion, a 7% decline from 2001 and 27% down from 2000, according to the U.S. Energy Information Administration, the statistical branch of the Department of Energy. The declining value of the dollar will only aggravate the drop in revenue, the EIA said.
"Countries which have the most pressing revenue needs and fewest cash reserves at their disposal will be more likely to increase exports," said Lowell Feld, an EIA economist and energy analyst. "Venezuela has pressing needs, although it buys a lot of imports from the U.S. Then countries like Indonesia, Nigeria and maybe Iran to some extent, which have large populations. They're poor and heavily dependent on those oil revenues, so they don't have many other options."
OPEC members that import many goods from Europe, such as some Persian Gulf nations, also would have an incentive to boost oil exports amid the dollar's decline, Feld said.
Some energy analysts expect OPEC's decision Wednesday not to raise its production ceiling will send oil prices higher in the months ahead.
Countering those projections, DRI-WEFA's Behravesh said increased oil exports spurred by the dollar weakness and a soft global economy may cause U.S. oil prices to drop by as much as $3 a barrel from the current level near $27.
Although analysts agreed oil exports will increase, some suggested that may have occurred even without a devalued dollar.
"A lot of OPEC countries really need the money," said Sean Sexton, senior director at Fitch Ratings. "Weakening of the dollar doesn't help that, but they would probably have increased exports anyway."
Oil output has grown in recent months, with OPEC already effectively rolling back the output cut of 1.5 million barrels a day implemented in January. OPEC members exceeded the ceiling reaffirmed Wednesday by about 1.4 million barrels a day in May, EIA analyst Erik Kreil said. OPEC members are likely to add another 500,000 barrels a day in the second half of the year, he said.
Price Impact Uncertain
Just how much more oil the market can take without prices suffering will depend on whether economic growth creates sufficient oil demand from the U.S., the world's largest oil consumer.
The EIA projects U.S. oil demand will rise just slightly on average this year to 19.67 million barrels a day, compared with 19.63 million barrels a day last year.
That growth will have to come in the second half, as demand fell in the first six months of the year. Some industry analysts said the economy will recover enough that producers will have to boost their output.
"Our assessment is that the market is going to need more oil in the second half," said Dennis Eklof, executive managing director for global energy at DRI-WEFA. "That may be affected by recent bearish economic news, but we've been expecting some economic recovery in the second half and going into next year."
Oil leaked by OPEC members to compensate for a weaker dollar would help feed that demand, Eklof said. "To some extent, the market is on OPEC's side," he said.
Optimists are on the defensive, however. Robust first-quarter growth had convinced many this spring that oil demand would indeed recover, but those forecasts have been overshadowed by scandals in corporate America.
The latest damage came from telecommunications giant WorldCom Inc. (WCOME), which said this week that its audit committee had uncovered what may be the largest accounting fraud in history.
The recovery remains "a little dicey," Banc One's Karydakis said, citing consumer-spending patterns and the slide in financial markets.
Others are more optimistic. Many economists see early indicators reflecting a robust reversal in June of waning consumption.
"Outside of Wall Street, the outlook is a little less bleak," Behravesh said.
-By Stephen Parker, Dow Jones Newswires; 201-938-4426; stephen.parker at dowjones.com
FSN54889 OC CURRENCY ENERGY TOP 2002-06-28 20:03:54 UTC ^^^^^