U.S. crude oil prices tumbled more than 50 cents a barrel Monday to $16.75 amid signs that OPEC producers are engaging in widespread price discounting to prop up sales volumes, analysts said.
West Texas Intermediate, the U.S. benchmark crude, traded as low as $16.73 a barrel for February futures contracts on the New York Mercantile Exchange.
In Nicosia, Cyprus, the Middle East Economic Survey said most Western buyers are "showing no interest whatever" in buying gulf oil "at anywhere near the official prices" set by the Organization of Petroleum Exporting Countries.
The authoritative oil journal said Saudi Arabia, OPEC's largest producer, is selling its oil at market-related prices to the four U.S. partners in the Arabian-American Oil Co. at a discount of about $2 a barrel off the cartel's $18-a-barrel benchmark price.
The four Aramco partners--Exxon, Mobil, Texaco and Chevron--buy 1.3 million barrels of crude a day from Saudi Arabia, the world's largest oil exporter.
A spokesman for Aramco refused to comment on the report.
Iran, Iraq and Libya are also said to be offering price incentives to maintain their share of the production quota established at OPEC's biannual meeting last month, according to oil traders. A ceiling of 15.06 million barrels a day, excluding Iraqi production, was set at the meeting.
Selling accelerated on the New York Mercantile Exchange after reports surfaced later in the day that Kuwait, another gulf member of OPEC, is offering discounts to Japanese customers of 50 cents a barrel. Industry sources said it also appeared that Saudi Arabia was extending discounts to Japanese buyers.
"The reports that the Saudis and Kuwaitis are offering discounts to their customers put psychological pressure on the market," said Peter Beutel, analyst at Elders Futures Inc. in New York.
On the Merc, West Texas Intermediate tumbled by 56 cents to $16.75 a barrel in active trading. On the U.S. Gulf Coast spot market, where oil is sold to the highest bidder, West Texas Intermediate fell 15 cents to $17.10 a barrel.
On the European spot market, the United Arab Emirates' Dubai light--the key OPEC crude from the Persian Gulf--inched up 5 cents to $15.30 a barrel. But Britain's North Sea Brent crude for February dropped 15 cents to $16.65 a barrel.
Large worldwide oil inventories are responsible for some OPEC members discounting from the group's $18 reference price, analysts said. During the fourth quarter of 1987, OPEC produced 18.43 million barrels a day against a ceiling of 16.6 million.
"The first quarter is the testing period," said George Friesen, an analyst at Dean Witter Reynolds Inc. "There is an inventory overhang and if there is a crack in OPEC allegiance, some of that will get dumped on the market."
Worldwide oil inventories were estimated at 3.66 billion barrels at the end of November by Energy Security Analysis, a Washington firm that tracks oil stocks.
Analysts said they were also skeptical that OPEC would succeed in maintaining production quotas.
During the first 10 days of January, OPEC production eased to about 16.7 million barrels a day from about 17 million during the final week of December, according to estimates by Paris-based Petrostrategies.
"Discounting has been part of life for some time," said John Lichtblau, president of Petroleum Industry Research Foundation. "OPEC's production quota is too high. They cannot have $18 oil and 18-million-barrels-a-day production."
Analysts said discounting on Aramco sales by about $2 a barrel by Saudi Arabia may fail to protect its market share
"The Saudis are absolutely adamant this time that they are not going to cut their production," one analyst said. "But this kind of discounting is certain to spread to other customers and to other OPEC producers."
Traders said the latest report of discounting also pulled down prices for unleaded gasoline and heating oil contracts on NYMEX.
February contracts for unleaded gasoline closed down 1.29 cents a gallon at 44.02 cents, while heating oil fell 1.97 cents a gallon to 51.76 cents.
"Crude prices were propped up by the cold weather and squeeze on the Brent (crude) market last week," said Bob Baker, an analyst at Prudential-Bache Securities. "These were poor bases to build a rally on and the market is coming back to the weak fundamentals."