Oil prices staged a headlong retreat Friday, hitting their lowest levels in more than two years on signs that key OPEC members, including Saudi Arabia, were unwilling to cut production despite an ever-growing glut.
OPEC Secretary General Subroto was quoted as saying that oil could fall to $5 a barrel, a rerun of the 1986 oil price collapse.
West Texas Intermediate, the benchmark U.S. oil, fell 55 cents on the New York Mercantile Exchange to close at $13.37 a barrel for the current November contract. Earlier in the day it reached $13.25, its lowest since August, 1986. On the spot market, West Texas was quoted at $13.30 a barrel, down from $13.90 on Thursday.
North Sea Brent crude, the most widely traded grade of crude, fell to $12 a barrel in New York for November loading, down 55 cents from Thursday’s close.
Since last Friday, U.S. spot oil prices have fallen about 80 cents a barrel. West Texas ended the previous week at $14.18 a barrel.
Eye on Iraq, Iran
Prices have tumbled because of signs that OPEC producers will take no meaningful action to reduce their high level of output. They are far below the OPEC target price of $18 a barrel as OPEC produces an estimated 2 million barrels a day more than needed to match demand.
“The basic problem is that there’s 2 million barrels a day more of supply from OPEC than the world is ready to accept,” said Peter Beutel, an analyst with Elders Futures.
Some analysts say the Saudis and their Persian Gulf allies no longer care about defending prices through the OPEC cartel that they helped to found in 1960.
Another theory is that Saudi Arabia was employing the strategy that it used when Sheik Ahmed Zaki Yamani was oil minister, when it often used its huge output capacity to flood the market and bring the other 12 fractious OPEC sellers into line.
This time, said oil analyst Steve Turner of London brokers Smith New Court, Saudi Arabia might have a strategic eye on Iraq and Iran, which may be tempted to overproduce wildly to pay to rebuild economies shattered by their six-year war.
OPEC has scheduled talks in October for the long-term strategy committee, including Iraq and Iran, to discuss excess output. A full cartel conference is scheduled for Nov. 21.
Iraq refuses any limit on output. It wants a quota equal to that of Iran, historically a bigger producer, but Iran and others have never allowed that. Among Saudi allies in the Gulf, the United Arab Emirates also has flouted its quota, calling it unfair.
Now, say Gulf-based oil industry sources, the Saudis have gone above quota, producing at least 4.7 million barrels daily in September against a cartel-mandated 4.34 million. And they have been discounting prices, European buyers allege.
The net result of these and other quota violations is total OPEC volume above 20 million barrels daily, the industry thinks, compared to just under 18 million, which cartel headquarters in Vienna reckons is called for to balance the market.
OPEC President Rilwanu Lukman of Nigeria says the excess could send prices below $9, as happened in 1986.
Analysts said that if the Saudis are simply trying to scare the rest of OPEC into line, there are risks. “The market is very cynical. It has ceased to give OPEC the benefit of the doubt,” said Turner.
Meanwhile in the Gulf itself, several analysts took another viewpoint.
They thought heavyweights Saudi Arabia, Kuwait and the United Arab Emirates may now aim simply to raise their share of the market, increasingly ignoring OPEC unity and seeking to control output right from desert well to gas station pump.
They said the present conflict may signal an OPEC watershed. With bigger financial and petroleum reserves, the Saudis and allies could sit out weak prices longer than other producers.
Also, they have been buying refineries and pump outlets in the West in order to become less vulnerable to fluctuations in crude oil supplies.
“The Gulf states have started to look like the Seven Sisters,” said an industry analyst in the Middle East, drawing a parallel with the seven giant, Western groups that controlled world oil before the rise of OPEC.