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September 28, 2000

Crude Oil Falls as Saudi Arabia Says It's Ready to Lift Output
By Mark Shenk, Bloomberg

Refineries Still At Full Capacity ... Weiss comments

NEW YORK - Crude oil fell for a sixth straight session after Saudi Arabia said it was ready to increase output further to ease pressure on the world economy.

Saudi Arabia is "ready to supply whatever amount necessary to stabilize the world market," Crown Prince Abdullah bin Abdulaziz al-Saud said at an OPEC summit meeting in Caracas. Oil last week rose to its highest price since 1990 even after OPEC increased production quotas three times this year.

"The comments from the crown prince were refreshing," said Aaron Kildow, an energy analyst at Prudential Securities in New York. "The Saudis are reiterating that they are willing to raise production."

Crude oil for November delivery fell as much as 54 cents, or 1.7%, to $30.92 a barrel on the New York Mercantile Exchange, the lowest price since Aug. 14. Prices have dropped every day since Sept. 20, when the October futures contract reached a 10-year high of $37.80 on its last day of trading.

In London, Brent crude oil for November settlement fell as much as 58 cents, or 1.9%, to $30.96 a barrel on the International Petroleum Exchange, its fourth decline in six sessions.

"We are worried about the increase in oil prices that could have a negative impact (for) world economic growth," said the prince, who is the de-facto ruler of Saudi Arabia.

The Organization of Petroleum Exporting Countries agreed on Oct. 1 to increase output quotas by 800,000 barrels a day, or 3.2%, starting Oct. 1. The group's two previous production increases this year took effect July 1 and April 1.

The price of crude may be falling, but don't expect the price of gas and heating oil to reflect this. Even a flood of crude on the market will not result in cheaper prices at the pump. U.S. refineries are operating at a whopping 95% capacity. Therefore, inventories of refined petroleum will remain near record lows for quite some time. To make matters worse, several oil refineries are scheduled for maintenance in October. This will exacerbate the bottleneck of oil on hand to be processed. As demand increases over the winter months, inventories will continue to fall. Replenishing these inventories is the only thing that will cause prices to inch lower. At this point, U.S. oil refineries can't even keep up with the crude coming into the States. So, fuel prices will remain high for the foreseeable future.

Despite Wall Street's enthusiastic reaction to this news, high oil prices will continue to eat away at company profits and produce a dismal earnings season. In fact, if Wall Street expects to see oil price pressures decrease and it rewards companies on the basis of this foolhardy gamble, stocks will tumble even more when companies reveal their disappointing earnings.

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