Persian Gulf Escort Has Oil Market Skittish

Oil prices are expected to rise this week as the U.S. Navy prepares to begin escorting Kuwaiti tankers in the Persian Gulf, but a confrontation with Iran would not sharply cut supplies, U.S. oil analysts said.

They said Sunday that fears of a U.S.-Iranian confrontation could boost prices past their recent $22.76 high to $23 a barrel.

Peter Beutel, analyst with Elders Futures Inc., said markets would react in a volatile way as the first escort, expected on Wednesday, neared.

“I would expect that by Tuesday any trader with a short position will be scrambling to cover and the price will be rising as the market tests last week’s $22.76 high,” Beutel said.

Bijan Moussavar-Rahmani of Harvard University’s Energy and Environment and Policy Center said: “While prices are now inching up, a big accident could send them up to $24 or $25 a barrel. Everything would depend on how the confrontation worked out.”

Iran has raised the temperature in the Gulf by threatening to sink American warships after the Reagan Administration announced that it would allow Kuwait to reregister 11 of its tankers under the U.S. flag and provide naval protection.

Cease-fire to Be Debated

The analysts said oil markets were likely to react later today when the United Nations Security Council debates a cease-fire resolution for the Iran-Iraq war.

David T. Mizrahi, editor of MidEast Reports, said it appeared neither Iran nor Iraq would accept a cease-fire.

“The uncertainty produced by all of this meets Iranian needs. They are pleased with this bullish situation for oil prices and would love to keep the pot brewing into the next (OPEC) Geneva meeting,” he said.

But the analysts said if no confrontation developed prices for crude, especially West Texas Intermediate, or WTI, could fall steeply.

“It is clear to nearly everyone that WTI is overpriced in relationship to (North Sea) Brent and (the UAE) Dubai,” Elders Utel said.

William Randol, international oil analyst with First Boston Corp., said market fundamentals at best supported a price for WTI of around $19 or $20. “So there is at least $2 a barrel of political tension in its current price.”

Ample Stocks Noted

The analysts also said any confrontation might not significantly reduce the flow of oil through the Gulf and even if it did, many countries had ample stocks to meet any short-term crisis.

“Most analysts don’t believe Iran could shut down operations in the Persian Gulf for more than a week because the U.S. naval presence in the region is simply too large and its capability of meeting most threats Iran could pose too great,” said Randol.

He said there was still too much unused capacity available within OPEC which could be expected to come on stream rapidly if there was a confrontation and prices rose further.

The analysts said that if only Kuwait was affected by a Gulf confrontation, no real supply crisis would result.

The Central Intelligence Agency estimates Kuwaiti production at about 1.3 million barrels per day or 10.9% of Gulf output.

In the event of a more extended crisis, the analysts said unused non-OPEC reserves could be brought back into production and production might be increased in the Soviet Union, Norway and Mexico, which over the weekend decided to increase its levels of oil exports to 1.36 million barrels a day. Mexico said the move is only a seasonal adjustment in line with recent decisions by the OPEC oil cartel.