Drop in Oil Prices Expected to Level Off, Hold at $15-$16 Range
With some help from mild weather, OPEC’s agreement to cut oil production and fix prices at $18 a barrel is being threatened by problems that were inherent in the accord hammered out by the oil cartel in December, economists and industry leaders say.
But most observers do not believe that the weeklong fall in crude oil prices--which has cast a shadow over the OPEC accord--will continue much longer, and several said they expect that prices will stabilize in the $15 to $16 range.
In fact, while prices on the New York Mercantile Exchange for future delivery of crude oil closed off another 33 cents Wednesday at $16.40 a barrel, they rebounded from a mid-day low of $16.05.
Nonetheless, future and spot prices have now slipped to the range that prevailed as oil ministers of the Organization of Petroleum Exporting Countries convened in Geneva in December and worked out an agreement intended to cut production by about 7% and ease a world oil glut.
The agreement drove prices up as high as $19.14 a barrel in mid-January amid signs that the leading OPEC producers were cutting their production as promised, canceling old contracts and negotiating new ones based on a complex set of fixed, official prices averaging $18.
But OPEC-watchers say that higher-than-expected production by Iran, the refusal of Iraq to sign the agreement, the persistence of an oil oversupply that gave buyers the option of purchasing crude oil elsewhere for a lower price, and subsequent cheating on production by some cash-hungry OPEC nations have made it all but impossible to sustain the $18 average price.
Iraq’s refusal to participate by cutting production was expected to be offset by the fact that its military foe, Iran, had suffered so much bombing of its oil facilities that it could not produce as much oil as it was allowed under the quota established in December.
But in fact, said former Iranian energy adviser Fereydoun Fesharaki, Iraqi bombing has suddenly focused on Iran’s cities instead of the oil fields. As a result, Iran is producing at nearly its full quota of about 2.2 million barrels a day, about 600,000 barrels more than expected, said Fesharaki, who recently returned from a trip to Tehran.
Supply Imbalance
The cartel’s total overproduction, estimated by some industry trade publications at 700,000 barrels above the target of 15.8 million barrels a day, has done little to improve the supply-demand imbalance that caused the 1986 collapse of oil prices, economists say.
At the same time, a generally mild winter around the world has required less oil than was expected to heat homes and factories, and even that peak seasonal demand period is now passing--further weakening the demand outlook for the weeks ahead, according to Chevron chief economist William D. Hermann.
“You just don’t have anything out there to support the $18 price,” Hermann said.
Only Saudi Arabia’s willingness to produce less than its quota--in effect, returning for now to its role as OPEC’s swing producer--has kept the cartel’s output in check and enabled it until recently to command close to the $18 average price it sought.
Saudi Intentions
Hermann said market rumors have the Saudis producing just 2.5 million barrels a day last week, versus its quota of 4.1 million. It was a decline in production to that level in summer 1985 that angered the Saudis and triggered their big run-up in oil output, causing the worldwide glut that sent prices tumbling from $30 to as low as $10 a barrel.
“That’s what’s a little worrisome about this,” Hermann said. “But if these rumors are true, it does suggest that the Saudis are determined to hold to the fixed prices.”
Despite recent news reports that Chevron, Texaco, Mobil and Exxon signed contracts through the Arabian American Oil Co. to buy Saudi oil at the official prices--a presumed show of support for the OPEC agreement--Hermann said the contracts undoubtedly are not binding.
“Any lifter (producer) would be extremely reluctant to sign a fixed-price contract without sufficient flexibility,” he said. “Otherwise, if you’re on contract and the prices goes $6 below you, you lose your shirt.”
Qualified Optimism
Even with the problems permeating the OPEC agreement, most economists and analysts believe that worldwide production has declined and oil demand has risen enough in the past year to prevent a return to single-digit oil prices. And some believe that the OPEC accord will hold over the long run.
“It will bend but it won’t break,” said oil analyst Bryan Jacoboski of Paine Webber in New York, a close follower of OPEC. “I think this is a temporary slide in prices.
“Most of the burden of the shortfall is on the wealthier Persian Gulf nations, because it’s the Saudi and Kuwaiti crudes that are the most overpriced,” he said. “They’ll probably be selling less than their quotas. Are they willing to see their market shares erode for a few weeks? I think they are.”
