OPEC Pact Won’t Produce Big Price Hike, Analysts Say
The hard-fought agreement on production by the Organization of Petroleum Exporting Countries isn’t expected to have a major effect on oil or gasoline prices, but some observers are calling it a victory of sorts for the cartel.
It took the longest meeting in OPEC’s history to essentially maintain a production status quo through the end of the year. The group agreed early Wednesday on a nominal increase of 200,000 barrels a day above the ceiling that is due to expire Oct. 31.
Most analysts agreed that the most important immediate effect of the agreement on a new ceiling of 17 million barrels of crude oil per day will be to prevent another price collapse from current world prices of about $15 per barrel.
Oil Prices May Firm
Another nose dive, perhaps to the $10 range reached last summer, was considered the inevitable effect if OPEC had failed to agree on at least extending the production curbs that have been in effect since Sept. 1.
“Relative to no agreement, the effect is considerable,” said Cheryl J. Trench, director of research at the Petroleum Industry Research Foundation. “Relative to what has been in effect, it will firm prices somewhat, but it won’t be significant.”
Crude oil futures prices on the New York Mercantile Exchange, which in previous days had taken into an account the likelihood of an OPEC agreement, actually fell 53 cents to $15.15 a barrel on Wednesday after the actual agreement was reached.
Estimates of the accord’s effect on world crude oil prices ranged from Kuwait’s forecast of a $3-per-barrel increase--which might eventually add 10 cents to the price of a gallon of gasoline--to no change at all.
Neither scenario would do much to improve the economic climate in the oil industry or provide the financial incentive to undertake major new exploration and drilling ventures, industry leaders said.
“The effect on the United States is that little change is in sight,” said George P. Mitchell, chairman of Mitchell Energy & Development Corp. in Woodlands, Tex. “World oil prices will not support any significant exploration or development. There will be little drilling, and the nation’s reserves will continue to decline.”
OPEC has been struggling all year to undo the damage it caused in the second half of 1985, when it decided to boost oil production in search of a higher share of the world market. The resulting glut sent crude oil prices tumbling by as much as two-thirds from the $30 that prevailed last November.
That has ravaged oil companies and the economies of OPEC members and some other oil-producing nations as drilling and exploration dried up.
Sharp Rise in Oil Imports
In the United States, while the price collapse drove inflation down, it has increased demand for oil products even as oil production fell. That has caused a sharp rise in imported oil to meet the demand.
After several failed efforts to bring supply back in line with demand and shore up prices, OPEC members in August agreed to trim production to 16.8 million barrels per day in September and October from about 21 million.
The latest meeting, a protracted 17-day affair in Geneva, marked by squabbles among members seeking higher shares of the production pie, highlighted anew the deep divisions within OPEC.
But some analysts were impressed that the disparate group managed to stay at the table long enough to reach even a status quo agreement and said that augured well for an eventual long-term accord. The group is to meet again Dec. 11.
“What’s clear is they’ve learned they can reluctantly cooperate and basically control prices,” said Stephen Smith, a vice president at Data Resources in Lexington, Mass. “They’re clearly attempting to function as a cartel, and nobody ever said that was an easy task.”
Increase Considered Small
But current stocks of crude and refined products are still “comfortable to high” in the United States, which will tend to cancel out the effects of a continued production ceiling, according to Chevron Corp.’s economics manager, Tom Burns.
Burns said prices could span the $15 to $17 range until late November, when renewed uncertainty about the next OPEC meeting is likely to depress spot prices again.
The planned increase of 200,000 barrels per day is considered so small as to have no practical effect on the supply-demand relationship.
World oil production is about 45 million barrels per day.
Futures trader John Hill of Merrill Lynch Futures in New York joked that the nominal increase would probably be enough to offset the costs of meals, lodging and entertainment during the OPEC members’ unexpectedly long stay in Geneva.
