Crude Oil Prices Tumble to Lowest Level Since ’86 : Oversupply, Report of OPEC Increase Result in Wave of Selling That Puts U.S. Benchmark at $14.94
A selling wave swept the oil markets Friday as crude prices fluctuated wildly and then slumped to their lowest levels in almost two years, capping a nervous week in which they tumbled more than $1.
The contract for August delivery of West Texas Intermediate, the benchmark U.S. crude oil, plunged 22 cents a barrel, piercing the $15 level to settle at $14.94 on the New York Mercantile Exchange. Crude prices have not finished as low since Dec. 10, 1986, when the near-term contract closed at $14.92 per 42-gallon barrel.
The price on near-term contracts has dropped from $16.83 a barrel since the Organization of Petroleum Exporting Countries agreed on June 14 to extend its previous production quotas, which have not prevented an oversupply of crude oil.
Oil from Britain’s North Sea Brent field, the most widely traded international crude, closed Friday on the exchange at $14.25 for oil delivered next month, down 20 cents on the day.
Higher Level Than a Year Ago
Prices of refined products traded on the exchange were mixed Friday. The July contract for home heating oil edged down 0.06 cent to 41.02 cents a gallon. The July contract for unleaded gasoline settled at 48.35 cents, up 0.29 cent from the previous session.
Growing evidence that supplies were running well ahead of demand caused the decline in crude prices, traders said. The American Petroleum Institute put U.S. crude oil stocks for the week ended June 24 at 358.7 million barrels, about 33 million barrels higher than a year ago.
“The overriding market sentiment is bearish based on recent statements out of the United Arab Emirates, high oil stock levels in the U.S. and no prospects of cutbacks in production by OPEC members,” said Michael Hiley, analyst with Drexel Burnham Lambert.
On Wednesday, an already weak market was pressured further by a report that the United Arab Emirates authorized Abu Dhabi--the emirate with the highest output--to increase its July production to 1.1 million barrels per day, a rise of 200,000 bpd. The increase would bring total UAE output to about 1.5 million bpd, well above its OPEC quota of 948,000 bpd.
Unusual Before Long Weekend
Oil traders said they were afraid that the move by the UAE could lead to competitive overproduction by other OPEC members.
First-half 1988 OPEC quotas for Kuwait and Saudi Arabia are 996,000 bpd and 4.34 million bpd, respectively. But according to a Reuters survey, Kuwait produced 1.25 million bpd in May while the Saudi output was 4.35 million bpd for the same month.
“The big fear now is Saudi Arabia and Kuwait will also start to overproduce, and the market needs some sort of reassuring comment from them,” said Andrew Lebow, an oil analyst with E. D. and F. Man International Inc.
Traders noted that the chaotic activity was unusual for what typically is a subdued session ahead of the long Independence Day weekend.
Crude prices fluctuated in a wide range, trading up to $15.44 a barrel early in the session before dropping below $15 after noon.
The lower prices were met with strong buying from investors on the sidelines. “There’s good buying around here,” said Madison Galbraith, a trader at Merrill Lynch Energy Futures. “The sellers are the ones who are hurting.”
Analysts were divided over the reason for the selloff. Some said that consistently lower oil prices finally convinced investors that it was time to swallow their losses and sell off contracts that were purchased at higher prices.
“They’re having to cut their hurt,” Galbraith said. “Those who bought above $16 a barrel . . . are trying to get out.”
But others suggested that some of the selling might have been undertaken on behalf of Saudi Arabia, which hoped lower prices would choke off oil revenue for Iran, removing a financing tool in Iran’s 7-year-old war with Iraq.
Lower oil prices could cut off “the supplies of money to Iran and bring the war machine to a grinding halt,” said Peter Beutel, an assistant director at Elders Futures Inc.
In addition, some speculated that the Saudis would rather lower prices than see U.S. oil companies explore for oil.
The decline came on the heels of a sharp drop in the previous session. On Thursday, the near-term contract of West Texas Intermediate fell 27 cents to finish at its lowest level since Dec. 21, 1987. The drop came amid fears of a possible price war after Egypt announced that it would cut the price on its crude oil exports for the first half of July.
