OPEC to Meet as Oil Prices Continue to Fall
Oil markets continued to weaken Friday as Chevron Corp. became the second major oil company to cut the price it will pay for a key grade of domestic crude, a move expected to put further pressure on OPEC nations to ease their official prices.
The Chevron price cut occurred as the Organization of Petroleum Exporting Countries confirmed that its 13 members will meet Jan. 28 in Geneva to once again discuss their weakening grip on world oil markets. It will be the second such meeting in a month.
Economists believe that the recent domestic price cuts, combined with unofficial price reductions by North Sea oil producers, will force OPEC to cut its benchmark price of $29 a barrel by as much as $2.
Last-Ditch Effort Possible
“They may make a last-ditch effort to draw the wagons around $29 a barrel, but they’re not going to be able to get a very tight circle,” said Daniel Yergin, president of Cambridge Energy Research Associates, a Cambridge, Mass., consulting firm. “The market is refusing to take seriously the $29 price.”
Each $1-a-barrel decline in the price of oil is equivalent to about 2 cents a gallon for refined products such as gasoline, analysts say. (A barrel contains 42 gallons.)
OPEC has been under pressure to cut its price for more than six months because its oil has been priced substantially higher than most buyers are willing to pay. The OPEC members have tried to arrest the decline in free-market prices by cutting production, hoping smaller supplies of oil would firm up prices. But widespread cheating by cartel members has undermined that effort, and prices have continued to slide.
Oil has been selling on the “spot,” or non-contract, market of Europe for between $1 and $2 below official prices set by producing countries. (Oil producers frequently sell oil on the spot market, at whatever price they can get, when the market for oil under contract at the official price is slow.)
Within the last week, British National Oil Co., Britain’s state-owned oil company, has begun selling its share of oil from the North Sea at free-market prices, currently about $2 under the official price of $28.65 a barrel. The Soviet Union, the world’s largest producer, has stuck by its official price of $28 but has started offering discounts to buyers, European traders say. And there have been rumors that some OPEC members, notably the West African nation of Nigeria, would desert the cartel and sell their oil at whatever price they can get.
Saudi Arabian light, the benchmark grade of oil used for OPEC’s $29-a-barrel price, has been selling on spot markets for about $28.15 a barrel, up slightly from the level of a few weeks ago because of production cuts by Saudi Arabia.
Futures Prices Are Down But the price of oil futures on the New York Mercantile Exchange has fallen substantially in the last month and closed at $25.77 a barrel Friday, reflecting investor sentiment that OPEC cannot maintain its official prices. (A futures contract gives the owner the right to buy or sell 1,000 barrels of oil at a specific price on some future date.)
The move by Chevron underscored the difficulty OPEC has had in lining up support among major buyers of Mideast oil in its effort to protect the $29 price. San Francisco-based Chevron and its Gulf Corp. subsidiary cut their price for West Texas Intermediate crude, the major U.S. grade, by $1 a barrel to $28. A number of smaller oil firms had moved to the $28 level earlier, and, on Thursday, Texaco Inc. became the first major oil company to follow suit.
“We’re following the trend,” a Chevron spokesman said Friday. “Texaco did it yesterday, and we’re doing it today. This is the free market in operation.”
Both Chevron and Texaco are partners in the Arabian American Oil Co., which operates oil fields under government contract in Saudi Arabia. Market sources said that the Aramco partners--the others are Mobil Corp. and Exxon Corp.--have been producing only a token amount of oil in the Mideast country, which they then buy at $29 a barrel, while increasing their purchases of oil on the “spot” market to make up for the shortfall. Exxon has thus far held its price for West Texas Intermediate at $29 a barrel, but Mobil has cut its price to $28.75.
Saudi Arabian Oil Minister Ahmed Zaki Yamani, perhaps the most influential of the OPEC ministers, has said that he is willing to be “flexible” in considering what to do about oil prices at the Jan. 28 meeting, a sign to industry experts that he would go along with a price cut.
Thomas McHale, an economist with the Wall Street firm of Drexel Burnham Lambert Inc. and a former adviser to the Saudi government, said that the Saudis have become very pragmatic about oil prices in recent months.
“There’s a growing awareness that they’re not in a position to dictate price levels,” McHale said. “But they and the other producer countries are trying to avoid being blamed for pulling their finger out of the dike first.”
OPEC a Follower McHale said that OPEC has historically been a follower rather than a leader of price movements.
“The market is far bigger than OPEC and has been for quite some time,” he said. His firm estimates that only about 20% of the world’s oil is currently changing hands at the official OPEC price, even though the cartel accounts for about 32% of world production.
Mark French, manager of energy analysis at Wharton Econometrics, a Philadelphia-based economic forecasting firm, believes that OPEC will have to cut its official price by $1.50 to $2 a barrel sometime in the next two months. He said that cold weather in Europe and the United States, which creates more demand for heating oil, could help postpone the cut, but only until spring.
“The colder the weather, the more buoyant world oil prices will be,” French said. “But the weather only disguises the problem. The long-term difference between supply and demand still exists.”
