Likely OPEC Cutback Helps Push Oil Prices Up
By Martha M. Hamilton
Washington Post Staff Writer
Friday, March 12, 1999; Page E03
Oil prices are beginning to recover from low levels that
produced inflation relief and record-low pump prices,
and so are oil industry stock prices, which contributed to
the run-up in the Dow Jones industrial average
yesterday.
The rally, which has pushed crude oil prices up 33
percent from a 12-year low of $10.72 in December,
resulted from different developments, according to oil
industry experts. The prospect of further cuts in
production when the Organization of Petroleum
Exporting Companies meets on March 23, a reduction in
inventories and heavy demand for heating oil in Germany
in advance of an increase in tariffs have all fed the trend.
Yesterday the rally stalled and prices fell slightly, with
April crude oil futures on the New York Mercantile
Exchange dropping 38 cents to $14.31 a barrel. But
many analysts continue to believe that the signs point to a
production cutback by OPEC nations, which were
meeting in preliminary sessions yesterday and today in
Amsterdam.
In the past, many oil-producing nations doubted Saudi
Arabia's commitment to reducing production, several
analysts said. But meetings over the past 10 days
between Saudi Arabia and Iran have begun to remove
those doubts, said Roger Diwan, director of global oil
markets for the D.C.-based Petroleum Finance Corp.
Diwan said OPEC might agree to cut about 2.3 million
barrels a day from production.
But industry analyst Constantine Fliakos of Merrill
Lynch & Co. said that Venezuela, which also is a
member of OPEC, is under pressure from its unions to
maintain production at current levels, which might
threaten an agreement.
But he noted that the huge inventories that have kept
prices low are beginning to be reduced. Oil inventories
were high because of warmer than normal winters in the
United States and Western Europe and because demand
declined as Asia's economic crisis spread.
"Ultimately, inventories correct," Fliakos said.
Philip K. Verleger Jr., who runs an oil industry research
firm in Boston, said that several anomalies also put
upward pressure on prices. One is heavy demand for the
oil used by industry and for home heating in Germany.
Verleger said the import duty on distillate imports goes
up on April 1, and buyers have been filling storage
capacity as that date approaches.
He also said cutbacks by independent oil producers in
the United States have resulted in higher prices in
markets where the benchmark West Texas Intermediate
is delivered. "Canadian and U.S. production has
dropped dramatically. Oklahoma is down 32 percent
year over year, and there may not be adequate capacity
to bring in imports to replace lost production," Verleger
said.
Still another factor is at work. Oil prices "are subject to
speculative swings," Verleger said, adding: "There are a
lot of hedge funds out there [that] buy and sell on
technical swings." He said that about $1.10 to $1.50 of
the recent price increase "can be traced to speculative
buying."
"If OPEC fails, and there's a 50-50 chance, all the
speculative buying will go off and the price will come
plummeting," he said.
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