Oil prices swung wildly Tuesday in reaction to conflicting signals on the OPEC production outlook, sending crude down 80 cents a barrel before it rebounded and ended the trading session with a 12-cent loss.
Many trading analysts said they expected volatility to persist, but the price trend was down. They said it was premature to assess the effect on energy costs in the United States, where imports comprise 40% of consumption.
"The selling market is extremely heavy," said Madison Galbraith, an energy specialist at Merrill Lynch Energy Futures in New York. "The psychology is very bearish."
On the New York Mercantile Exchange, the contract for February delivery of West Texas Intermediate, the main U.S. crude, closed at $16.63 per 42-gallon barrel, down from $16.75 at the close Monday. At one point during hectic selling, West Texas contracts hit $15.95 a barrel.
Refined-product prices dropped as well. The February contract for wholesale unleaded gasoline fell 0.53 cent a gallon to 43.49 cents, and the February contract for wholesale heating oil lost about 0.49 cent a gallon to 51.27 cents.
Prices tumbled for a second day because of reports that Saudi Arabia, the key producer in the Organization of Petroleum Exporting Countries, was heavily discounting to woo customers in an oversupplied market, possibly signaling a new price war.
Buyers returned later Tuesday on subsequent reports quoting Nigerian Oil Minister Rilwanu Lukman as saying that the cartel was currently pumping as much as 700,000 barrels per day less than had been estimated by world oil experts. Speaking at a London seminar sponsored by a securities firm, the influential OPEC chairman put the group's current production--including Iraq--at between 16 million and 16.5 million barrels per day.
"There will be no free fall in prices," said Scott Jones, an energy economist with WEFA Group. "OPEC is now holding the world on the string, and it can change the bearish sentiment around by displaying some resolve to control production."
Nevertheless, analysts were more concerned with the reported discounting by the Saudis, which would mark a significant blow to the unity of OPEC, already frayed by feuding and duplicity in its own price and production decrees.
"The reason behind the price decline is this OPEC crowd has not been able to get its act together," said John O'Dea, manager of international energy futures at Dean Witter Reynolds Inc. in New York.
"They cheat on prices and production, they give discounts and make a number of arrangements under the table. For the past year, their credibility has eroded," O'Dea said. "It just seems to be every man for himself."
Saudi Arabia had been a strong defender of OPEC's official $18-a-barrel price, but the authoritative Middle East Economic Survey reported Monday that the Saudis had begun selling at open market prices to some customers. There also were reports that Kuwait, another supporter of OPEC discipline, was doing the same thing.
Moreover, the Saudis are thought to be primarily concerned with maintaining their market share and foresee prices declining to $15 a barrel soon, a number of analysts suggested.
In the past, Saudi Arabia curtailed production to constrict supplies and stabilize prices. But this strategy failed consistently because other OPEC members took advantage of the Saudi cutbacks to sell more oil themselves.
Analysts said Saudi abandonment of their "swing-producer" strategy was understandable considering the financial pressure faced by the kingdom, not only because of lower oil prices but the dollar's weakness.