Oil prices expected to drop today

Monday, September 25th 2000, 12:00 am
By: News On 6

Oil prices are likely to drop Monday when traders have their first real chance to respond to the release of 30 million gallons of crude oil from the nation's Strategic Petroleum Reserve, industry analysts say.

But the price may not be too far below Friday's level, when New York Mercantile Exchange prices closed at $32.68 a barrel for November delivery.

That's a far cry from the $37.20 close on Wednesday, the last day of trading for October delivery contracts.

The price of West Intermediate Texas crude oil dropped $1.67 to $32.73 a barrel, The Wall Street Journal reported in its Monday editions.

Energy analyst Tom Bentz of Paribas Inc. in New York said traders had anticipated that President Clinton would order a release from the nation's Strategic Petroleum Reserve.

Therefore, prices had been dropping for several days before the announcement, he said.

"We may fall a bit further on this news. But I guess that it's probably 75 percent priced in already, so I'm not really convinced that we're going to fall under $30 a barrel" for the benchmark West Texas Intermediate crude oil, he said.

Republicans and Democrats continued a heated debate on the political motivations and ramifications of the release over the weekend.

Republican vice-presidential nominee Dick Cheney said Mr. Clinton's action illustrates his administration's failure to execute an effective energy policy.

He said the country is suffering from high prices partly because the government hasn't encouraged domestic oil production.

"What is their energy policy? There is none," Mr. Cheney said Sunday on ABC's This Week with Sam Donaldson and Cokie Roberts.

"Now that ... [Vice President Al Gore is] in an election campaign," Mr. Cheney said, "he's out pointing the finger, blaming everybody else."

Mr. Clinton said Saturday that the release was meant to address an anticipated shortage of home heating oil in the Northeast this winter, not to help Mr. Gore's campaign.

"The overriding purpose for our action is to increase supply and help consumers make it through the cold winter," he said on the South Lawn of the White House. "Families shouldn't have to drain their wallets to drive their cars or heat their homes."

Rilwanu Lukman, the secretary general for the Organization of the Petroleum Exporting Countries, said the move would cause prices to fall, but he warned that the United States was setting a precedent.

"If you use the ... [strategic reserve] to ease prices, what are you going to do when there's a real emergency?" he asked at a news conference in Caracas, Venezuela, where OPEC heads of state will meet this week. "But it's up to the U.S. to release these reserves."

Fadel Gheit, an analyst at Fahnestock & Co. in New York, said that the Clinton move would bring prices down in the short term but that it may very well backfire.

The decision undercuts efforts by the Clinton administration to get OPEC to increase output, he said.

"We expect the oil markets to weaken, but that will increase volatility in the markets," Mr. Gheit said. "OPEC may say, 'OK, you want to use your oil reserve? We won't raise production any more. You want to manipulate prices? Be our guest.'"

Mr. Lukman said he expects prices to fall to $22-$28 a barrel in the next two months. If those targets are not met, OPEC will pump out an additional 500,000 barrels a day.

Finance ministers attending an International Monetary Fund meeting Sunday in Prague, Czech Republic, said persistently high oil prices could threaten global economic growth and be especially damaging to developing countries that are heavily reliant on imported fuel.

"Everybody now accepts that we must have reasonable long-term prices," said Gordon Brown, the United Kingdom's chancellor of the exchequer. "And I think people do know that the OPEC countries themselves have said that a sustainable rate for the oil price per barrel is far lower than the existing price."

Oil has stayed persistently above $30 over the last seven weeks, despite OPEC's Sept. 10 decision to boost output by 800,000 barrels a day as of Oct. 1. It marked the third official production increase by OPEC since March.

On Wednesday, oil for October delivery settled at $37.20, the highest closing price since October 1990. But the next day, oil for November delivery closed at $34, a $1.24 drop from the November close on Wednesday.

On Friday, at about the same time that Energy Secretary Bill Richardson was announcing the release from the reserve, November oil closed at $32.68, down $1.32. That was the lowest price in nearly a month.

Analyst George Gaspar of Robert H. Baird & Co. in Milwaukee said the fall in prices reflected more than just speculation about a reserves release, but the release could accelerate the fall in oil prices.

On Monday, Mr. Gaspar said, "We're going to have a downer. The amount of crude is sizable. But maybe there's no telling where the bottom may be on this. It may cause some overage of crude supply that in the near term will force oil prices below the $30 level quickly."

The impact on supply and prices will depend a great deal on how quickly the supplies can be moved into the market, and the ability of refineries – already working at or near capacity – to handle the extra oil.

"It's all going to depend on how it will work its way into the market," Paribas' Mr. Bentz said.

Bloomberg News and Dow Jones Newswires contributed to this report.