Oil Prices Seesaw Wildly, Emphasizing Calls for Urgent OPEC Meeting
Oil prices continued to tumble on most world markets Monday as one key Middle East crude neared the $11-per-barrel mark, reinforcing calls for an urgent committee meeting of the Organization of Petroleum Exporting Countries.
As if on cue, some oil prices rebounded late in the day on what appeared to be improved prospects for a meeting of OPEC’s special price committee. But there was little evidence that the downward price spiral had been halted.
The recent drop in prices to near a two-year low is particularly striking because it comes at a time of year when crude oil prices should be firming with the approach of the winter heating season.
“I think oil prices are in for a rough ride,” said energy economist Charles K. Ebinger of the Center for Strategic and International Studies in Washington. “I think the Saudis will try to contain it, but there’s a strong possibility they could lose control of it.”
Already, prices of some grades of Middle East crude are perilously close to the low point of $9 per barrel reached briefly in the summer of 1986.
Growing inventories will tend to soften prices of heating oil even as winter approaches, analysts said, and there might be some seasonal weakening of gasoline prices.
Generally, however, they said the price of gasoline will continue to resist the decline in the price of crude.
Hussein Tahmassebi, chief economist at Ashland Oil Co., a major refiner, said the biggest reason that gasoline prices have remained relatively high amid falling crude prices--limited U.S. refining capacity--hasn’t changed.
The unraveling of prices trigged statements of alarm from OPEC leaders around the globe, with President Rilwanu Lukman of Nigeria warning that “the current tide of overproduction and new oil . . . can re-enact the 1986 episode. OPEC then will not be able to maintain a floor price, allowing prices to plummet to $9 a barrel again.”
Venezuela’s new oil minister, Julio Cesar Gil, said the price deterioration has reached a “critical point” and urged action by OPEC’s price panel. Saudi Arabian King Fahd issued a call for restraint by OPEC members, and denied published reports that the kingdom opposed a special committee meeting.
Fahd was quoted by the official Saudi news agency as saying that he had warned other OPEC members this would happen unless discipline was restored to the organization. He called on members and other oil producing nations to act “before the current adverse situation gets worse.”
Fahd’s comments were credited with reversing a steep slide in prices on the New York Mercantile Exchange, where the price for future deliveries of the benchmark U.S. crude oil tumbled as much as 43 cents a barrel to $13.75 by mid-afternoon. Prices then turned dramatically, ending the day up 31 cents at $14.49 per barrel.
The spot markets didn’t reflect the king’s remarks, however. Britain’s North Sea Brent, the world’s most widely traded crude, nose-dived 92 cents to $12.48 a barrel. On the U.S. Gulf Coast, West Texas Intermediate plunged 60 cents to $13.90 cents a barrel.
The crude known as Dubai Light, an important grade of oil from the Middle East, lost 72 cents to $11.11 a barrel. Arab crudes typically trade for $1.50 per barrel less than comparable U.S. crudes, reflecting the cost of transportation from Middle East to U.S. ports.
The Dubai price underscores just how far prices have fallen below the “official” OPEC price of $18 per barrel for an average of a “basket” of OPEC crudes. Even contract prices are being heavily discounted, and OPEC members are flouting their supposed production quotas.
The latest downward pressure on oil prices has been blamed, in part, on expectations that a cease-fire between Iraq and Iran will enable them to increase their production of oil as they seek revenue to rebuild their war-damaged economies. The original response to the possibility of a cease-fire was a rise in oil prices on expectations that peace would bring harmony to OPEC.
Meanwhile, Iraq continues to produce far above the OPEC quota it officially disavows, and the United Arab Emirates is producing at what it considers its rightful quota. Another major cheater in August was Kuwait, according to the authoritative Petroleum Intelligence Weekly.
Overall, the cartel is producing about 20 million barrels of crude per day, or about 2 million barrels more than the world needs. That has created huge inventories, enabling oil companies to hold off ordering from producing nations until prices fall further.
Economists forecast prolonged weak prices for oil unless OPEC is able to quickly reverse directions and rein in its excess production, an action which few believe the cartel can accomplish.
“There’s just a lot of oil out there,” said William D. Hermann, chief economist at Chevron Corp. in San Francisco. “I’m surprised (the price of oil) hasn’t gone lower faster than it has.”
