Fall in Oil Prices Puts Saudi Minister to Test

Saudi Arabian Oil Minister Hisham Nazer found out this week--at his great expense--that he, too, could influence oil markets.

His charismatic predecessor, veteran minister Sheik Ahmed Zaki Yamani, had a habit of talking markets up or down.

But a remark by Nazer in Baghdad on Monday sent oil prices into a tailspin.

Nazer told an Arab energy conference that Saudi Arabia did not favor cutting OPEC’s output as a way to boost weak oil prices. His statement immediately drove prices down sharply.

Oil industry analysts say the problems that haunted Yamani still stalk Saudi Arabia, and Nazer now faces his first major test after 15 months in the oil minister’s hot seat.

Nazer enjoyed an early honeymoon with the Organization of Petroleum Exporting Countries, engineering a price and output package to turn around a sagging market in late 1986.

But now prices have slid to the same depressed level as when he first appeared on the scene.

Influence on Prices

The Middle East benchmark crude Dubai traded at $12.85 on the spot market Wednesday, well down on the official $17.42 price and close to the $12.25 level seen on Oct. 30, 1986, when Nazer took over from Yamani.

Oil industry sources said a price drop of 70 cents a barrel after Nazer ruled out an OPEC output cut showed that as head of the Saudi oil industry, he had the influence to drive prices down.

But declining world oil demand and rising oil production in non-OPEC countries have made Saudi Arabia virtually powerless to push prices up without harming its precarious economy.

The analysts said Nazer now faces very similar problems of glut and unpredictable markets that Yamani battled in his last days as oil minister.

“Nazer has long-term plans . . . (he wants) to increase OPEC’s market share as world demand expands on stable OPEC output and prices,” said Peter Nicol of Chase Manhattan Securities in London.

Those plans include restructuring the Saudi oil industry and establishing a foothold in consumer markets.

‘Swing Producer’

Under Yamani, Saudi Arabia was OPEC’s “swing producer,” cutting output at times of market weakness to help prices recover.

But Nazer has made it clear that Saudi Arabia will not revert to the role that cost it billions of dollars in lost revenue.

As a swing producer, Saudi oil production dropped as low as 2 million barrels a day, compared to its 10-million-barrels-a-day capacity.

The analysts said Saudi Arabia was now keeping output to its OPEC quota of 4,343,000 barrels a day and trying to protect its market share by selling oil at prices linked to the spot market, at least to some customers.

“If they discount to everyone, the market will collapse. They are putting their unsold production in storage . . . to sell whenever they find buyers,” an oil industry executive said.

Oil industry sources said the market was shocked by Nazer’s statement in Baghdad at a time when oil prices were firming on expectations of an output cut by OPEC.

“It was an uncompromising and aggressive statement. . . . The Saudis will also pay heavily as their oil revenues will be hit,” an oil industry executive said.