Price of oil now likely to hinge on whether output actually falls ZTC

The Outlook

March 29, 1998|By David Novich

WITH oil prices having recently hit nine-year lows, the Organization of Petroleum Exporting Countries is once again planning to cut production.

At their meeting Monday, 10 members of OPEC and four other nations pledged to cut 1.4 million barrels a day. But the last time OPEC met, in November, it agreed to boost its output quota by 10 percent, and, according to the Middle East Economic Survey, production exceeded the quota by 1.27 million barrels in February.

Will OPEC will be able to enforce cuts? And what will happen to oil prices?

Fadel Gheit

Senior oil analyst, Fahnestock & Co., New York

This time is going to be different because the tremendous drop in crude rocked OPEC from top to bottom. Prices hit the threshold of pain, where a lot of these countries might face political upheaval. They didn't agree to it because they wanted to, but because the economic conditions forced them to.

The decision to raise the production ceiling by 10 percent was a maneuver by Saudi Arabia and Venezuela -- because they had the capacity and capital to do so. But most countries couldn't, and the higher quota was ill advised.

The single most important factor that caused the fall in prices was Mother Nature. The extremely warm weather made [a surplus of] 1 to 2 million barrels in unwanted crude. Also, the collapse in Asia brought down demand growth. Now, it is the lowest demand period of the year.

If OPEC needs to cut 2 million barrels per day to cut supply, then that is what they will do.

In the long run, we have to worry about Iraq, when it will finally be allowed to sell oil with no restrictions. If we don't have sufficient demand growth, then we'll be in trouble.

Also, the former Soviet Union could cause problems because of its huge reserves. But we are so far from hitting peak production, and you cannot assume that these countries are going to be exporting and living in tents. They will also spend on cars and houses -- and their demand will go up.

Joseph Coale

Director of corporate communications, Crown Central Petroleum, Baltimore

The pattern has been that they're not able to cut production. There's a meeting this week, and a lot can happen between now and then. A lot of countries have cheated, and if the pattern continues, we might see it again. There's too much politics to expect a consensus.

Right now, gas is cheaper than bottled water at the supermarket. That can't be expected to continue indefinitely, but it will, until crude production drops. There are all types of factors -- the crisis in Asia and a warm winter -- but when you get down to it, there's just more supply than demand.

Technology has added so much oil to the market -- we're looking at more than we ever would have thought possible 10 years ago. Fuels are also getting cleaner and engines are more efficient.

Stabilizing the price is important to giving stability to those economies that are dependent on it. In the short term, lower prices might help us, but in the long term, it will only hurt us.

David Snow

President, Energy Equities Inc., Wayne, N.J.

A million barrels a day from the market, about half of what OPEC is planning, is what will materialize. El Nino has been one of the biggest problems here. The first time it was here, in '82-'83, we had a crash in oil prices, and it's always meant bad news.

There's a real pain threshold among exporting countries. Venezuela has had heavy oil [requiring more refining], and that has meant lower profit margins for them. But with Mexico playing ball, there's enough in the three countries to make a dent in production.

China will gradually recover from the Asian crisis, and El Nino will be over by the summer. We'll have a cool summer and a good outlook.

Noel Mayder

Manager of risk management, Unocal Corp., Houston

It's an uncertainty whether OPEC will be able to cut production. If they can get some of the non-OPEC members, like Russia, to cut production, that's significant. And the Saudis, when they say they'll cut production, they always do. But now, the cut is not significant enough to have higher oil prices.

People were surprised with an OPEC-non-OPEC agreement, and I don't know anyone who expected anything to come out of the meeting. That's what caused the run-up on Monday.

But I don't see the market reaching $20 a barrel, with all they have overproduced.

Pub Date: 3/29/98

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