Oil prices may go lower if Iraq resumes exporting

The Outlook

June 21, 1998|By J. Leffall

OIL PRICES continued their slide last week, tumbling to their lowest level in a dozen years on growing worries about oversupply as oil producers slashed prices to try to win customers. The situation was exacerbated by word that Iraq had agreed to a work schedule for clearing up outstanding disarmament issues. If it adheres to the timetable, it could resume oil exports as soon as October. Will oil prices continue falling? How much of an impact would Iraq's re-entry into the export market have? What are the implications for the U.S. and global economies?

Adam Sieminski

Oil analyst, BT Alex. Brown Inc., Baltimore

Oil went down to $12 per barrel and with adjusted inflation, we haven't seen something like this since the oil crisis in the 1970s. Part of the sell-off we are seeing right now is because of the possible lifting of a two-layered sanction against Iraq. The oil-for-food deal the United Nations made with Iraq limited the country to 700,000 barrels per day to export. That number has since gone up to 1.5 million barrels a day as the U.N. eased restrictions. Other sanctions had to do with weapons control. The end analysis of all this is that if Iraq were to cooperate with the U.N., they could export at the best of their capacity.

There are two fundamental problems here. Asia just keeps getting worse and worse, and that is removing demand for oil, which creates surplus. Inventories have built up to high levels, particularly here in America. It's a double-edged sword. The United States is the No. 1 oil consumer, so that's good. But it is the No. 2 producer, and that's bad for states like Texas, Louisiana, Oklahoma and Alaska. In '86 when this happened [low oil prices], there were banking failures, and at this price level countries such as Mexico, Norway, Venezuela, Saudi Arabia and Kuwait are going to be hurting. A workable price is $18 to $20 per barrel -- anything more or less is unstable.

Katheryn Kobe

Vice president and senior economist, Joel Popkin & Co., Washington

Prices have gotten a little bit lower than I thought they would. But Iraq has kind of just been out there all along, and everybody knew that as soon as Iraq was able to re-enter the exporting arena, oil prices would be going down.

We are in a situation where gas prices are at the lowest levels they've been in a long time, but if you're a producer that hurts. Part of this decline is because of reduced demand in Asia, and since it's not clear when those problems will end, some branches of oil exports will be crippled indefinitely. As Asia gets back on its feet, prices will become a bit more stable.

For the summer it looks as if the oil market will bottom out. It's going to be a great summer for road trippers and vacationers but rocky for producers. Beyond that time frame, it's difficult to determine prices. Usually oil prices don't stay down for long.

Michael Young

Oil analyst, Deutsche Bank Securities, Boston

One of the single largest reasons for price decline has been Iraq's re-entry into export markets. Iraqi exports are up in the first six months of 1998 but the problem is the market is already fully supplied.

OPEC [Organization of Petroleum Exporting Countries] has been struggling with this price problem and probably will continue to do so. Meanwhile the U.S. is a significant consumer of oil. As a matter of fact, oil imports amount to 10 million barrels a day. The United States is a very large net importer of both crude oil and petroleum products. In the short run, the economy is the net beneficiary of this situation because it has some bearing on the inflation outlook.

The downside of all this is that prices are hovering somewhere between $12 and $13 a barrel. Without question that's too low of a price, and it is clearly wreaking havoc on the economies of developing nations. Geopolitically speaking, one might argue that this does more harm than good for the global economy. Because the next single largest reason for this downturn is, of course, Asia. OPEC wants to balance supply and demand, but I don't think they'll be able to do that anytime soon. Market swings will have to take over and production has to slow. That way supply and demand balances itself.

The summer driving season looks good because of low gas prices, but eventually it's not going to be in America's interest to have collapses in Indonesia and Russia or changes of power in Saudi Arabia.

Joel Fischer

Oil analyst, Burnham Securities, New York

We have to look at this globally. OPEC is not the only group that has a direct interest in this price fluctuation. There are other nations that are not OPEC countries, such as Britain, Norway, Mexico and Canada, that are deeply affected by these shifts.

Prices are strongly downward right now because of the suspicions and fears of traders. Analysts don't set the prices, company don't set the prices -- traders do. Right now traders are looking at short-term trends and the overflowing inventory in some of the world's oil reserves. When the U.N. chief weapons inspector gave Iraq favorable reviews, that scared the traders.

Right now one of the best things that could happen is that Iraq should be allowed to re-enter OPEC because it has done well in the past with its exporting pursuits.

Iraq doesn't need to be an economic renegade.

In the meantime, what will change traders' minds is countries being able to contend with oversupply and also address weakening demand in Asia. Growth in Asia is a mere fraction of what it used to be.

So Asia needs to get better, supply needs to drop off and something drastic needs to happen to change the course of production.

Pub Date: 6/21/98

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.