Oil Prices Fall Amid Signs of Rising Supply
Crude oil prices fell almost 7% Friday, the biggest one-day drop in 10 months, after reports that the world’s top producers are not sticking to their promised production cuts. Prices slumped 15% this week.
OPEC produced 0.7% more oil in September than in August, according to a Bloomberg survey of oil executives and analysts this week. The boost signals reduced compliance with pledged output limits at a time when prices had recently reached their highest level in 2 1/2 years.
“OPEC was rewarded when its compliance was high, and they’ll be punished even more when it’s low,” said John Kilduff, senior vice president of energy risk management at Fimat USA Inc. in New York. “This is getting to be the mother of all pullbacks.”
Crude oil for November delivery fell $1.55, or 6.9%, to $20.90 a barrel on the New York Mercantile Exchange, the biggest one-day drop since Dec. 17 and the lowest price since Aug. 25.
The single-day decline in December came when bombing raids on Iraq by the U.S. and Great Britain failed to disrupt Iraqi oil exports. Since then, shipments from the Persian Gulf nation have risen 19%, softening the impact of output cuts from its fellow OPEC members. Iraq is not a party to output-cutting agreements. Its production was up 90,000 barrels a day in the latest Bloomberg survey, accounting for half of OPEC’s gains last month.
This week’s drop could be short-lived, analysts warn.
“People have overreacted about reports on OPEC compliance,” said Marianne Kah, chief oil economist at Conoco Inc., the nation’s fifth-biggest oil company. “The physical reality is for a tight market, getting tighter.”
Even so, crude oil has not had such a bad week since June 1998, when production increases implemented by OPEC six months earlier were flooding world markets with oil at a time when demand from Asia was faltering. Falling prices in 1998 spurred OPEC’s output-cutting program.
Selling by speculative commodity funds has been a big reason crude oil has fallen so far so fast, traders said. The number of contracts to buy oil owned by speculators has dropped 13% in the last two weeks, according to a Commodity Futures Trading Commission report released after trading.
Traders are awaiting a U.S. response to a message reportedly sent by Iraqi President Saddam Hussein to President Clinton. The message proposes an end to United Nations sanctions in return for a promise of political reform in Iraq, the British Broadcasting Corp. said, citing newspaper reports.
Iraqi diplomats at the U.N. denied knowledge of any such letter. An end of sanctions could open the door to higher exports from Iraq.
Meantime, Clinton said his administration should look at selling oil from the U.S. strategic petroleum reserve as a way to moderate oil prices in the Northeast this winter.
“The price of oil was historically low for a good long time,” Clinton said in response to a question at a news conference in Ottawa after meeting with Prime Minister Jean Chretien. “It’s made an honest rebound. I’m grateful it hasn’t led to inflation.”
Oil-related stocks declined, with the Standard & Poor’s index of exploration and production companies falling 3.7%. On the New York Stock Exchange, Apache Corp. dropped $2.38 to close at $38, Unocal Corp. fell $1.25 to $35.25, Arco slumped $3.40 to $85.56 and Chevron Corp. eased 44 cents to $85.38.
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Oil’s Slippery Slide
Crude oil prices plunged 15% in the last week on fears that the Organization of Petroleum Exporting Countries will not be able to resist the temptation to pump more oil--even though on Sept. 22 OPEC agreed to continue production cuts through March.
Daily closes and latest for a barrel of West Texas Intermediate: Friday: $20.90
Source: Bloomberg News
