Prices Climb as World Oil Glut Appears to Be Mirage

Times Staff Writer

The world’s growing appetite for oil and the apparent closing of ranks by the Organization of Petroleum Exporting Countries sent oil prices close to $20 per barrel Wednesday, reflecting a turnaround that has turned oil experts bullish but is fueling fears of inflation.

Continuing a steady ascent that has taken many industry observers by surprise, the price for futures contracts for the benchmark U.S. crude spurted 48 cents to $19.77 a barrel. That is up 7% in three days and a full 45% above the price fetched as recently as mid-November.

One analyst likened the oil market to a “freight train,” though prices aren’t expected to go much higher for now. Nonetheless, the price climb is attributed to a realization that the world oil glut is smaller than previously believed.

The continued spurt in oil prices is sure to add inflationary pressure, which has become a worrisome feature of the U.S. economy in recent months. The steep 12.7% annual wholesale inflation rate for January was blamed heavily on energy costs, including a 6.7% rise in crude energy materials and a 4.1% increase in wholesale gasoline prices.


Estimates Double

The consensus that oil supplies have tightened was supported by reports Wednesday that Saudi Arabia will reduce its April crude oil sales to European, American and Japanese customers by 20% to 30% from contracted levels in order to abide by its OPEC production quota.

Separately, the American Petroleum Institute said the nation’s crude oil inventories fell a steep 2.3 million barrels to 332 million barrels last week, while gasoline stocks also fell and heating oil stocks reached their lowest levels since 1972.

As previously reported, government agencies in recent months have roughly doubled their estimates of how much oil the world consumed last year. That radically changed the landscape because it meant that oil inventories were significantly smaller than was thought.


The greater than expected consumption, paced by the United States and Pacific Basin nations, was attributed to strong economic growth, the spur of prices which remained far below pre-1986 levels, droughts which forced the use of more oil to make electricity and other factors.

“That was the most significant event,” said Hossein Tahmassebi, the chief economist at Ashland Oil Co. “Suddenly we find out that two or three years’ growth in oil demand took place in just one year. We were very bearish last November, but we have to be bullish now.”

In a recent report, First Boston Corp. analyst William Randol cited the International Energy Agency’s sharp upward revision of its oil demand estimates and recommended that investors buy oil stocks: “A doubling of the rate of petroleum demand growth would have profound implications for the future oil market environment.”

Many Production Problems

Meanwhile, the 13 OPEC nations have succeeded in cutting their production since a key meeting in November that resulted in Iraq returning to the cartel’s quota system. They have since been supported by promised production cuts in several non-OPEC oil exporting nations.

Also, some OPEC watchers now theorize that cartel members were exaggerating their own oil output last year to wangle higher individual quotas.

Meanwhile, supplies are being constrained by a series of production problems in the British and Norwegian sectors of the North Sea--including the explosion that destroyed an Occidental Petroleum platform last year--which have kept as much as 600,000 barrels per day of oil off the market for several months.

“There are a lot of reasons for the strength in oils,” said another Wall Street analyst. “Some are lasting, some are more seasonal or temporary. But this strength has been pretty amazing.”


The recent upward price movement has prompted analysts to cautiously boost their price estimates for the rest of the year, with forecasts moving from the $15 to $17-per-barrel range to $17 to $19 for the benchmark West Texas Intermediate grade of crude oil. Seasonal ups and downs are still expected.