All Eyes on OPEC as Oil Prices Fall
Oil and natural gas prices plunged Monday as OPEC oil producers prepare to meet Wednesday amid fears of war and a global recession.
Benchmark petroleum futures fell 15%, the biggest single-day drop in a decade, to $22.01 a barrel. Natural gas futures fell almost 10% to $1.91 per thousand cubic feet, the lowest in three years. Natural gas now trades at one-third the price it did in March. Gasoline and heating oil futures also fell sharply.
“What’s going on? Panic,” said Michael C. Lynch, chief energy economist at DRI-Wefa energy consultants in Lexington, Mass.
In driving prices lower, traders are betting that demand for oil in coming months will shrink because of the global economic slowdown and reduced air travel. Falling commercial air traffic alone has shaved as much as 2.5% off daily U.S. crude consumption, according to Platts, an oil research and publishing concern in New York.
The oil market’s downward movement may be difficult to understand for those who lived through the oil shocks of recent decades, when Middle East wars or the threat of them caused prices to spike. Traders in the current atmosphere, however are betting that the war the United States is preparing to wage will not seriously disrupt Middle East oil supply lines.
In one of the most keenly anticipated meetings since the 1991 Persian Gulf War, Organization of Petroleum Exporting Countries ministers are expected to bow to pressure from the Bush administration to not cut production to boost prices and thus demonstrate solidarity with the anti-terrorism campaign.
Like many observers, John Kingston, global director of oil at Platts, a division of McGraw-Hill, thinks OPEC will stand pat and make no changes.
“On the one hand, OPEC does not want to be seen as cutting production in the wake of this tragedy, and on the other hand, it is under pressure [from the United States] to raise output at a time when demand is cratering,” Kingston said.
As of August, OPEC had cut 2.5 million barrels a day from its 2001 production and had ordered 1 million barrels more to be cut in September in response to falling demand. DRI-Wefa’s Lynch thinks that OPEC may proceed with the second part of a 1-million-barrel cut in official production quotas that so far has only been half imposed.
“OPEC is under enormous pressure between George [W.] Bush and from the market. They are getting clobbered from both sides,” Lynch said.
Bush’s arm-twisting is being directed toward OPEC members Saudi Arabia and Kuwait, which together produce 40% of OPEC’s 23.2 million barrels of oil a day. The administration hopes the countries will remember that the United States led the forces that crushed the Iraqi army in the Persian Gulf War, said Fadel Gheit, a New York oil analyst with Fahnestock & Co.
“It’s time for payback,” Gheit said. “If not, maybe the next time the Kuwaitis have a problem, the United States won’t be there to help.”
Nawaf Obaid, an advisor to Hess Energy Trading in New York, said Saudi Arabia has made it known that it will meet the United States’ request to keep the oil spigot open at current levels, either within the framework of OPEC or outside it.
“OPEC these days will take a back seat to the Saudis,” Obaid said. “If they are asked to, the Saudis will increase production unilaterally, whether OPEC is on board or not,” said Obaid, who is writing a book on Saudi oil policy. The Saudis produce 7.8 million barrels of oil per day, but have excess production capacity to tap, Obaid said.
OPEC ministers will either maintain current production levels of 23.2 million barrels a day or, at worst, follow through with the second half of a 1-million-barrel-per-day production cut that was already in progress before the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon, Lynch said.
War will worsen things for the U.S. economy, which many economists believe entered a recession in the current quarter. Fear of terrorism is resulting in a decline in air passenger traffic and jet fuel sales, eliminating up to 500,000 barrels in U.S. oil demand a day, a 2.5% drop, Kingston said.
Global oil demand in August averaged 77.1 million barrels a day, down 1% from August 2000, said Ed Morse, also of Hess Energy Trading in New York.
A weak oil market is good news for U.S. motorists. The average U.S. retail price for self-serve regular fell 4.4 cents in the last week to $1.485 a gallon, the Energy Information Administration said Monday.
In California, the average price for self-serve regular was $1.66 a gallon Monday, off 1.2 cents a gallon from the previous week and off 20.2 cents a gallon from this time last year.
In the week after the East Coast attacks, which brought isolated reports of gasoline price gouging, the U.S. average gasoline price rose only 0.2 cent, according to the EIA’s weekly survey of more than 9,000 service stations.
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Times staff writer Nancy Rivera Brooks contributed to this report.
