Crude Oil Prices Plunge as Gulf Tension Eases
In what was believed to be a record free-fall, crude oil prices plummeted 13% Monday as tensions eased in the Persian Gulf and prospects increased for a diplomatic resolution of the Middle East crisis.
Prices for unleaded gasoline for later delivery fell 16.3%. The sharp decreases continued a sell-off that began Friday and ends for now the meteoric climb that brought prices to record levels last week on fears of war.
On Monday, the price of crude oil for October delivery dived $4 to close at $26.91 a barrel in trading on the New York Mercantile Exchange. At one point, crude oil contracts traded as low as $4.86 a barrel below Friday’s closing price. By comparison, crude oil futures traded as high as $32.25 a barrel last week, equal to the record high reached on Aug. 2, 1983.
Although the mercantile exchange keeps no precise records on daily declines, a spokeswoman for the exchange said that “to the best of anyone’s recollection . . . there hasn’t been a drop this large since the contract started trading” on the exchange in 1983.
Similarly, September contracts for unleaded gasoline saw a record one-day drop, closing down 17.10 cents to 87.56 cents a gallon. Last week, gasoline closed as high as $1.0855 a gallon. Prices also fell on the spot market, where crude oil and oil products are traded for immediate delivery.
“People obviously held back selling (on Friday), waiting to see if there was any confrontation” over the weekend, said Randall Rothenberg, a broker with Dean Witter International Energy Futures Group in New York. “Now that they’ve seen a lack of confrontation in the Gulf . . . people are taking it as a (sign) of some sort of resolution of this conflict.”
But few analysts believe gasoline pump prices will fall as quickly as they rose when prices for future contracts shot up immediately after the Iraqi invasion of Kuwait on Aug. 2.
“I still think that oil companies intend to increase gas prices a few cents per gallon, claiming that we haven’t passed the costs through yet, so it will be a while before consumers see decreases at the pump,” said Edwin Rothschild, energy policy director for the consumer group Citizen Action in Washington, D.C.
Traders attributed the rapid declines to news that indicated a softening of Iraq’s position: word that U.N. Secretary-General Javier Perez de Cuellar would meet with Iraqi Foreign Minister Tariq Aziz and news that Iraq had ordered its tankers not to run a Western blockade.
Fears had run high going into the weekend that the Persian Gulf standoff could erupt over Iraq’s demand that foreign embassy staffs leave Kuwait. But no confrontation developed.
Trading was also influenced by prospects that members of the Organization of Petroleum Exporting Countries would agree to increase oil production quotas to offset production lost by the embargo of Iraqi and Kuwaiti crude oil. After the close of trading, 10 of 11 OPEC ministers meeting in Vienna reportedly agreed to boost quotas, though further talks were scheduled today.
Now, most traders doubt that prices will again reach $32 a barrel--that is, unless a shooting war breaks out. “There’s still a political standoff, and one incident could trade us right back up again,” said Tom Bentz, director of trading at United Energy Inc. in New York. “It’s still a touch-and-go situation.”
In any case, motorists fuming at the sharp run-up in pump prices should not expect any relief soon. On Monday, none of the major oil companies that sell gasoline in Los Angeles announced price cuts; some had increased wholesale dealer prices as late as Sunday.
When gasoline pump prices skyrocketed almost immediately after the invasion, oil company executives blamed the undue influence of spot and futures markets.
“If a significant change in the gasoline futures market occurs, its effects will appear within a few days at gasoline stations all over the nation,” the American Petroleum Institute said in a publication explaining the price run-ups.
But that apparently holds only when prices go up. In July, when crude oil prices fell as much as 20% from January, gasoline pump prices remained firm and even increased in some cases. At the time, refiners and oil companies blamed high demand and tight refining capacity.
This time around, oil companies are saying that they haven’t yet recovered their increased costs from the hike in crude prices that resulted from the invasion.
“The market hasn’t equalized yet,” said James Huccaby, manager of pricing and supply with Chevron U.S.A. in San Francisco. “Over time, however, if the market does decline . . . you can be assured we will be pricing our products competitively.”
But analysts said not to expect retail prices to fall for at least three or four weeks--presuming oil prices remain stable, which is hardly likely.
Still, some analysts defended the industry. “Once you commit to a lower price, then you’re stuck with that commitment for a period of time,” said Scott Jones, president of AUS Consultants in West Conshohocken, Pa., and a former economist with Atlantic Richfield Co.
“If oil prices turn around and go back up for a few days, you’re stuck with that decision,” he said. “And the last thing you want to leave with consumers is prices that go up and down . . . price volatility is something the consumer doesn’t want to see.”
In addition, said price analyst Trilby Lundberg: “The direct impact of the futures and spot gasoline market is less powerful at the tail end of the peak summer driving season (now) . . . than at its absolute height in July and August” because of falling demand.
In any case, don’t blame your local gasoline station. The retail dealer has not passed on all of the wholesale price increases he has had to pay since the invasion, said Lundberg, publisher of the widely read Lundberg Survey of national gasoline prices.
Wholesale prices rose an average of 9.43 cents a gallon nationally between Aug. 10 and Aug. 24, according to the latest Lundberg Survey of 13,000 dealers. At the same time, the retail price increased only 5.2 cents a gallon to $1.3316, the survey reported.
STOCKS ADVANCE: The Dow Jones average rose 78.71 points to 2,611.63. D1
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