Drop in Oil Prices Seen by Analysts : Failure of OPEC to Reach Agreement on Production Cited
The Organization of Petroleum Exporting Countries’ failure this weekend to reach any agreements on how to stabilize crude oil prices brought renewed predictions among industry analysts Monday that prices would soon tumble.
“The direction is certainly down,” said Dillard J. Spriggs, president of Petroleum Analysis, a New York consulting firm.
OPEC said it would meet again July 22, but analysts viewed it as unlikely that the cartel would agree on new production quotas or lower crude prices.
“They know each other too well to have confidence in each other,” said Milton Lipton, president of Walter J. Levy Consultants in New York.
The 13-member cartel hastily called the meeting last weekend in reaction to a recent slide in world oil prices on the spot, or non-contract, market. But the members were unable to agree on how to halt the slide and left the meeting with little more than a pledge to stop cheating on pricing rules.
Lower Oil Revenues
Oil analysts said Monday that OPEC’s best alternative is to reduce its production quota, which is currently set at 16 million barrels a day, in order to bring supply more in line with worldwide demand. But a lower production quota would mean lower oil revenues, and several of the smaller OPEC countries, particularly Nigeria and Ecuador, would be less able to finance their huge foreign debts.
“I don’t see how they would agree to do that,” said Constantine Fliakos, an oil analyst with Merrill Lynch in New York.
Analysts said current demand for OPEC oil is about 14 million barrels a day.
Fliakos said he expects Saudi Arabia to increase its production substantially before the end of the year. Saudi Arabia, the nation with the largest oil reserves, has a 4-million-barrel-a-day quota but has been pumping only about 2.5 million barrels a day in an effort to maintain prices. The Saudis have said, however, that they are tired of suffering while other nations overproduce.
“The price will drop sharply and could go to as low as $20,” Fliakos said. Saudi Light, the benchmark OPEC crude, is priced at $28 but trades as much as $1 below the official price on the spot market.
On Monday, the spot price was $27.05, unchanged from Friday, according to Telerate Inc., a financial information firm.
World oil markets were fairly stable Monday. On the New York Mercantile Exchange, the price for August delivery of West Texas Intermediate, the leading domestic crude oil, opened at $26.69, off 22 cents from last Wednesday. But the market rallied later in the day and closed at $26.99, up 8 cents.
Saudi Decision Fuels Rally
“We’re back to where we started before the OPEC meeting,” said Steve McKiernan, an oil trader with Drexel Burnham Lambert in New York. McKiernan said Monday’s rally was fueled by Saudi Arabia’s announcement that it would postpone any decision about boosting production until after OPEC’s July 22 meeting.
Mike Geoghan, a floor broker with Faber’s Futures in New York, said buyers who expected OPEC to cut its prices and postponed crude oil purchases jumped into the market Monday.
“It appears that the market is saying OPEC won’t cut its price,” Geoghan said.
Lipton said that the stability in the spot market suggests that oil inventories had possibly been depleted earlier this year but are now being replenished. If that’s the case, he said, demand for OPEC oil should increase slightly, taking pressure off the cartel.
“In that case, the best thing for OPEC to do is to sit back and do nothing,” he said.
