Close With a Small Decline : Oil Prices Recover From Early Plunge
Crude oil prices plunged to near two-year lows Tuesday but then recovered much of the ground to finish with a small loss for the day.
Economists described the action as part of a predictable pattern of gradually eroding prices through the end of 1988 as world economics encourage continued overproduction by members of the Organization of Petroleum Exporting Countries.
The sharp drop early in the day reflected strong disappointment in the outcome of OPEC’s price committee meeting, which adjourned Monday without any concrete plan for dealing with the world oil glut and weakening prices.
And two more scheduled OPEC committees meetings over the next two months are unlikely to produce any long-term plan that will result in stable world oil prices, some industry economists said.
On the New York Mercantile Exchange, the November contract for West Texas Intermediate, the benchmark U.S. crude, settled 6 cents lower at $14.14 a barrel after falling to $13.85 early in the day. Other contracts also closed lower.
On Sept. 12, prices briefly touched $13.75, the lowest since settling at $13.75 in October, 1986.
Wholesale unleaded gasoline for October delivery advanced 0.34 cent to close at 45.59 cents a gallon, while other contract months ended the day mixed. The October wholesale heating oil contract closed down 0.72 cent at 39.51 cents a gallon, and other contract months also declined.
Prices dropped early in the day as negative sentiment from OPEC’s price committee meeting pervaded the market, analysts said. Prices continued to deteriorate as reports circulated that U.S. crude inventories were higher.
The market recovered most of its losses by the end of the day, a turnaround that market analysts attributed primarily to technical factors.
Predictable Pattern
Some analysts said they expected slightly lower prices in the near term, followed by a recovery if the OPEC committee meetings in October and November lead to a reduction in oil output.
But economists said Tuesday’s sharp drop in prices was part of a predictable pattern of gradually eroding prices by the end of the year and possibly beyond.
“I don’t think there’s any doubt that economists are correct and we’re headed lower,” said James Steel, an analyst at Refco Inc. “Market analysts are too immediate in their thinking.”
Economists base their predictions in part on the fundamental difference between production costs and selling price.
Steve H. Hanke, chief economist of Friedberg Commodity Management Inc. in Baltimore and professor of economics at Johns Hopkins University, said the marginal cost of production ranges between 30 cents a barrel for Iraq and $4.65 for Nigeria.
“The cost is much below current prices. Therefore, everyone has an incentive to cheat and produce more,” Hanke said. “This is aggravated by a situation where the biggest producer, the Saudis, are running a huge fiscal deficit and other OPEC producers have severe needs also.”
Hanke said he did not expect the OPEC meetings to produce anything substantive for the long term. Any increase in prices will be only temporary, he predicted, with prices possibly plunging to $10 over the next several months.
Cyrus H. Tahmassebi, chief economist at Ashland Oil Inc., said that while the OPEC meetings were a step in the right direction, they were not likely to produce any concrete solutions in the near term.
“OPEC’s problems are long term and they need to identify them as well as their objectives,” Tahmassebi said. “Maybe after four or five meetings they might come up with something credible that might work in the long run.”
