Oil Prices Fall Toward $20 as Surplus Creates ‘Panic’

Oil prices plunged toward $20 a barrel Monday in what traders called a “panic” atmosphere as too much oil found too few takers on world markets.

Analysts said that the continuing sharp drop in crude oil prices, especially for oil sold for immediate delivery on the so-called “spot” market, could translate into cheaper prices at gasoline pumps within a few weeks. And they saw no quick end to the price slide.

In Saudi Arabia, whose increased production of oil was blamed for much of the fall in prices over the last week, Oil Minister Ahmed Zaki Yamani was reported ready to approach Britain and other nations about coordinating production to prevent a full-blown collapse of oil prices.

The precipitous decline was described by Kuwait’s oil minister as “price anarchy” that could last three months before producers, especially the Organization of Petroleum Exporting Countries, can reorganize and put a ceiling back on production levels.

It was OPEC’s apparent decision in early December to protect its “fair market share,” even if prices fell, that led to increased production and the quick drop in prices, which began in earnest in the middle of last week. Mild weather, cutting demand for heating oil, has worsened the oversupply.

The April delivery price of one key type of crude oil from Britain’s North Sea slipped Monday to $19.50 a barrel in London markets. In this country, the February delivery price of the so-called benchmark West Texas Intermediate crude dropped more than $2 to $21.27 a barrel.

Both prices are those that speculators pay for contracts for future deliveries of oil. The U.S. “futures” market, traded in this country on the New York Mercantile Exchange, typically accounts for 40% of all oil sold.

On the spot market, where oil for immediate delivery is bought at prices that closely track futures prices, West Texas Intermediate crude sold Monday for $21.70 a barrel, down $2.25.

Spot prices more quickly find their way into the retail prices at the gas pump, where, so far, prices have not reflected the sharp drop. Analysts said that lower pump prices are not likely for several more weeks, and the drop would be less dramatic than the decline in crude-oil prices because of marketing and other costs.

30% Decline in Prices

Prices for crude oil have dropped about 30% since late November, when West Texas Intermediate was selling for about $31 a barrel. Nearly half the decline has occurred since last Wednesday, when reports of a big January increase in Saudi production reached traders.

“The momentum, the panic, has just taken over,” said analyst Peter C. Beutel of Rudolf Wolff Futures, a New York brokerage firm. “One has to assume we’ll have a rally, but the question is when.”

For futures contracts on oil to be delivered more than one month ahead, the Mercantile Exchange’s rules cut off trading after any decline of $1 a barrel. That occurred early in Monday’s trading, when March crude oil dropped to $21.60 and April crude reached $20.90. Beutel said they might have slipped below $20 in open trading. A barrel contains 42 gallons.

The price on the Mercantile Exchange for contracts to deliver heating oil in February fell nearly a nickel to 59 cents a gallon, and the price for February gasoline fell 4.4 cents to 58.9 cents a gallon.

Refinery Output Up

One effect of the current oversupply has been increased output by U.S. refineries struggling to keep up with the flow of oil. Analyst Beutel estimated that refineries are processing about 12.5 million barrels a day, up 1 million barrels from a year earlier. That, coupled with what it called weak demand for petroleum products, prompted one big oil company, Conoco, to announce a cutback Monday. The company said it will reduce processing of crude oil by 44,000 barrels a day, or about 20%, at three refineries beginning in February.

At service stations around the country, the Los Angeles-based Lundberg Survey turned up a decline of 2.4 cents a gallon in the wholesale price of gasoline and a half cent in retail prices between Dec. 20 and Jan. 10, President Dan Lundberg said. The early January average retail price of gasoline was $1.206 a gallon.

Lundberg said that a drop of $3 to $5 a barrel in crude oil prices might eventually translate into a savings of “a penny or two” a gallon at the pump. But he said other factors, including the further phase-out of lead from gasoline (which means more crude is needed to make a gallon of gasoline) will tend to offset any savings.

Data Resources in Lexington, Mass., estimates that a one-year decline of $5 a barrel in crude oil prices would reduce the U.S. inflation rate by 1%.

Overtures to Britain

But, for major oil-producing nations, a collapse in oil prices causes severe dislocations. It is to forestall such problems that Sheik Yamani plans to make overtures to Britain to see whether non-OPEC oil-producing nations are willing to coordinate production with the once-dominant cartel, according to the Middle East Economic Survey, published in Cyprus.

The publication said that OPEC members will not hold down production to bolster prices “until they are given a helping hand in the form of substantial production cutbacks by the non-OPEC exporters.” Britain, Norway and Mexico are among the largest non-OPEC oil producers.

A meeting of Yamani and British Energy Secretary Peter Walker in the “fairly near future” would be “a sounding board to determine whether, under the imminent threat of a disastrous collapse of the oil market, an accommodation on production control can be reached between OPEC and non-OPEC oil exporting countries,” the journal said.

Meanwhile, Kuwaiti Oil Minister Ali al Khalifa al Sabah was quoted as saying that a price war will create “chaos on the international market, during which oil prices will drop for a period.” But, sooner or later, he said, producing nations will “realize it’s not in their interests to allow it to continue, whether they be OPEC or non-OPEC countries.”

Cooperation Doubted

At San Francisco-based Chevron, chief economist William Hermann doubted that OPEC would have much success in getting cooperation from Britain or others because most non-OPEC oil producers are also heavy oil users whose economies benefit from lower prices.

“I think OPEC might be trying to see what happens if everyone is undisciplined,” Hermann said. “But they’re going to look at what happens to their revenues below $20 a barrel and decide they don’t want to continue.”

In the absence of any coordinated effort to trim production, Thomas McHale, senior economist at the investment firm of Drexel Burnham in New York, said, it is theoretically possible that producers would keep pumping oil until prices got as low as $7 or $8 a barrel--what he called the “out-of-pocket cost” of production.

“But the feeling in the industry, at Shell, Exxon and others, is that at $15 to $18 a barrel there would be a confluence of political pressures” to shore up prices, McHale said.