Oil Prices Climb on Word of Tentative OPEC Accord

Oil prices in Europe rose to the highest level in two months Friday in response to reports that the Organization of Petroleum Exporting Countries has reached tentative agreement on production ceilings for the next six months.

In London trading, prices shot up $1 a barrel, to $14.38, for North Sea Brent crude oil to be delivered in January. According to analysts, prices could increase as much as $2 if the agreement is ratified by the 13 members of the oil cartel.

(The New York Mercantile Exchange, where oil futures are traded in the United States, was closed for a long Thanksgiving weekend holiday.)

Some analysts, however, warned that the new OPEC quotas--plus under-the-counter sales--might still be more than the market can absorb.

Meanwhile, OPEC delegates meeting here marked time Friday while they awaited a final decision from Iran as to whether it would accept the new production and pricing policy, which aims to keep the target price for OPEC oil at $18 per barrel. The deal hinges on Iran’s approval of an equal production quota for its longtime foe, Iraq.

For the past year, OPEC had set a total production quota of 16.6 million barrels a day. But most members had exceeded their share of that total, so that the cartel had been producing an average of 22 million barrels a day, according to oil industry observers. That oversupply had helped to drive down prices lately to around $12.

Iranian Oil Minister Gholamreza Aghazadeh flew from OPEC’s Vienna headquarters to Tehran on Friday to present his government with the compromise proposals devised during more than a week of meetings here.

Aghazadeh was not expected to return. Iran’s acceptance or refusal of the OPEC formula could be announced from Tehran or at the next full OPEC meeting. On Friday, the cartel postponed a formal session of its oil ministers until this evening to allow time for them to brief their governments on details of the package. But some delegates believe that talks may not resume until Sunday.

The deal worked out here would grant Iraq production parity--at 2.6 million barrels a day--with Iran, which historically has been a larger producer. Under the agreement, each of the two Persian Gulf nations, which in August ceased fire in their eight-year-old war, would pump 14.27% of OPEC’s new production ceiling.

In reality, under the complex mathematics of the arrangement, some of Iraq’s production quota would be donated from the quotas of other OPEC members. Thus, although Iran would lose the battle to keep Iraq’s quota below its own, the deal would allow Iran to save face and state that Iraq’s parity is actually made up from other OPEC countries.

At the same time, the plan more than makes up for the other 11 members’ contributions to Iraq by raising the cartel’s total daily quota to 18.5 million from 16.6 million barrels for the first six months of 1989.

The higher quota is aimed at satisfying all the members, by enlarging everyone’s official share, while restoring some production discipline so that less oil is pumped than has been the case in the last year. And a lower total, if observed, should raise oil prices.

Mike Rothman, senior oil analyst at Merrill Lynch who has been following the talks from Vienna, was quoted by Reuters news agency as saying: “It is a reasonable compromise. . . . Everyone gets a little something. This proposal will prevent a collapse in prices.”

Referring to the $18-per-barrel target price, Iraqi Oil Minister Issam Abdul-Rahim Chalabi said here Friday, “I think we can reach that price.” But most industry observers say that the cartel will be lucky to see oil go as high as $15 a barrel--and that it may not even reach that because of the current glut. Oil analyst Harry Neustein, a veteran international trader, pointed out Friday that even if the OPEC agreement goes through, it will not take effect until Jan. 1.

“The question, as far as short-term prices go, is whether the big (Persian) Gulf OPEC producers will flood the market between now and then,” Neustein said.

The members of OPEC are Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.