Oil falls on OPEC plan to boost output

Monday, April 3rd 2000, 12:00 am

By: News On 6

On Wednesday, a day after the Organization of the Petroleum Exporting Countries agreed to raise oil production, crude prices fell to their lowest point since Jan. 12. In addition, the U.S. Department of Energy said gasoline prices declined last week for the first time in several months.

President Clinton called OPEC's decision "good news for our economy and for the American consumer. These increases should bring lower prices, which will help to sustain economic growth here in America and also and very importantly, throughout the world."

The president said he expects prices for gasoline, diesel fuel and home heating fuel to fall in the next few weeks. However, "I urge the oil companies to do everything they can to bring the savings to consumers as quickly as possible," Mr. Clinton said at a news conference.

Leaders from nine of OPEC's 11 member nations agreed to a one-year plan Tuesday that boosts the cartel's daily oil production by 1.45 million gallons beginning Saturday.

Iranian leaders fought the increases and criticized U.S. pressure on OPEC, but Iran reportedly plans to match the 7.4 percent production increase.

Non-OPEC member Mexico, which joined the cartel in cutting exports last year, said Wednesday that it plans to boost production by 10 percent. And Norway, another major non-OPEC producer that cooperated with the production cutbacks, has indicated that it will push up output, too.

The market's immediate reaction to the OPEC pact was to push crude oil prices lower, the direction they've been headed since oil futures hit a nine-year high of $34.13 a barrel on March 7.

Crude oil for May delivery dropped to $26.45 a barrel in Wednesday trading on the New York Mercantile Exchange, down 64 cents - or 2.4 percent - from Tuesday's price. Since March 7, the price of oil has dropped 22.5 percent.

It may come as a surprise for motorists rendered speechless by rapidly rising gasoline prices, but the average price of gasoline has begun edging down, the Energy Department's Energy Information Administration said in its latest survey of U.S. gas prices.

A gallon of unleaded regular averaged $1.508 nationwide last week, down more than 2 cents from the previous week and the first week-to-week decline since Jan. 10. In the Gulf region, which includes Texas, the average price for unleaded regular gasoline dropped to $1.468, down from $1.480 a week earlier, the government said.

Analysts predicted that oil prices probably would settle into the mid-$20s as the additional crude starts flowing from producing countries.

However, they warned that the additional production would only meet existing demand. It won't replenish inventories depleted in the 12 months since OPEC leaders and several other major countries slashed oil output by more than 2 million barrels a day.

"I think they made the right move for their purposes and for the stability of the market," energy analyst Kenneth Miller said.

Mr. Miller, senior partner of Purvin & Gertz Inc. of Houston, predicted that OPEC would have to keep ratcheting up oil production in a number of steps to achieve the balance needed to supply world demand without repeating a collapse in oil prices as in1998 and early 1999.

"The level they chose to boost up production relative to their previous pledges is what I'd call a modest move. My advice to them is to take the Greenspan approach: Take a little at a time and test the market," said Mr. Miller, referring to Alan Greenspan, chairman of the Federal Reserve Board, which has increased interest rates modestly several times to try to slow the U.S. economy.

One problem in analyzing the impact of OPEC's action is that everyone is guessing how much extra oil the new deal will really deliver.

The agreement represents an increase of 1.45 million barrels a day as of April 1, 1.7 million if Iran is included. However, the London-based Centre for Global Energy Studies noted that actual OPEC production exceeds the official quotas.

"Given that OPEC members are already overproducing by at least 1 million barrels per day, this 1.7-million-barrel 'paper' increase would translate to a rise of just 770,000 barrels per day in actual production, were the organization's members to stick rigidly to their new quotas," the consulting group said. "As in the past, compliance is unlikely to be absolute and some 'leakage' can be expected."

The London group predicted that over-quota production would add an additional 300,000 to 400,000 barrels to OPEC's daily output, resulting in an actual increase of about 1.1 million barrels a day.

Mr. Miller said Tuesday's decision should bring stability to the market, which has been waiting for months to see what OPEC would do.

With crude oil on a decline, gasoline prices should follow, even though they never went up as much as crude oil prices.

"We've obviously started to drop. It'll probably come down some more, obviously," he said, assuming that there are no major refinery shutdowns or other things to disrupt the supply to service stations.

"Certainly, in the [gasoline] spot markets, the peaks have been hit, way back when we had $34 crude," Mr. Miller said. "We're way down from that level already."

R. Lewis Ropp of Frost Securities Inc. in Dallas said it will probably be 30 to 45 days before the world truly determines the new production levels, not just from OPEC but from the other major players and new supplies developing from West African fields.

But even if oil output rises sharply and oil prices stay down, the price at the pump may not reflect that decrease very quickly, Mr. Ropp said.

Refiners, whose profits were battered in recent quarters, want to keep their prices high to make up for low margins they suffered, he said.

"I don't think there's going to be a meaningful correction near term in gasoline prices.

"If we don't see this additional production on the market, then I really think we'll see higher gasoline prices later in the year," the analyst said.