OPEC Cuts May Push Oil Prices Past $20 a Barrel, the First Time in 2 Years
By Mark Pittman
OPEC Cuts Poised to Push Oil Prices Past $20/Barrel: Spotlight
Oklahoma City, July 4 (Bloomberg) -- Bill Dost figures his
little corner of the oil patch is about to start paying its own
way again.
Seven months after the price of crude oil fell to a 12-year
low of $10.35 a barrel, it's surged more than 80 percent to
$19.69 in New York. Now, Dost and other small producers who
managed to stay in business during a two-year price slump are
expecting prices to rise even more. And they're not alone.
''Oil can't help but go up,'' said Dost, the president of
WFD Oil Corp., a 250 barrel-a-day producer in Oklahoma City. ''I
am an eternal optimist, but I think we're going to $22 by
December. Then the people who run these small wells can make the
bank payments and put some beans on the table.''
Dost may not have to wait that long.
From Houston to Wall Street, the consensus is that West
Texas intermediate crude oil will soon trade for $20 a barrel,
probably in the coming week, the first time that's happened since
June 4, 1997. Eight analysts and traders surveyed by Bloomberg
News over the past two weeks said crude oil would top $20 by the
end of September.
That could spell higher prices at the pump for U.S.
motorists. Two years ago, the last time oil fetched $20, the
average for a gallon of regular gasoline was $1.2070, or about 8
percent higher than it is today, according to the U.S. Department
of Energy. Pump prices already are up 23 percent since February.
19-Month High
Crude oil rallied Friday to close at the highest price in 19
months. It's up 20 percent since May 31 on mounting evidence that
output cuts by world producers are reducing a global surplus that
sent prices plunging last year.
OPEC led a group of nations, including Mexico and Norway,
that pledged to reduce world output by more than 5 million
barrels a day in a series of agreements stretching back to April
1998. OPEC's 11 member nations, led by Saudi Arabia, account for
a third of the world's daily oil supply.
While some traders last year doubted the cuts would succeed
because so many countries had a history of pumping more oil than
they promised, OPEC's recent record has been good. OPEC members
met 94 percent of those cuts in June, according to Bloomberg
estimates.
The effect of output cuts are only now being felt by U.S.
refiners, particularly those along the Gulf of Mexico, one of the
largest refining regions in the world. Tankers require about six
weeks to travel to the U.S. from oil fields in Saudi Arabia or
Kuwait, so refineries are only now seeing fewer loads. That's
reducing inventories.
''The cuts really didn't filter into the market until mid-
May because of the long-haul nature of tanker deliveries,'' said
John Saucer, an analyst at Salomon Smith Barney Inc. in Houston.
''It's all theoretical until refiners see the number of ships
drop off.''
New Believers
U.S. oil inventories now are 3 percent smaller than a year
ago, and that's making believers out of some earlier doubters.
Jeff Billings, head trader at Brandywine Asset Management, a
commodity fund in Thornton, Pennsylvania, just two weeks ago said
oil prices probably wouldn't rise to $20 a barrel because
''there's still too much crude.'' Now, Billings says prices could
go to $21 a barrel before falling back.
''With the production cuts in place, it's going to $20,
maybe $21,'' he said Friday. ''I still don't see us going to $23
or $24.''
To be sure, even analysts who expect prices to rise say
crude oil won't average $20 for the second half of the year. For
instance, J.P. Morgan & Co.'s chief oil economist Irene King, who
said oil could reach $20 during July, said oil prices for the
second half of 1999 will be $18.45.
Also, members of the Organization of Petroleum Exporting
Countries have said previously they would consider increasing
supplies if prices rose above $22 a barrel in New York. They want
to discourage other producers from increasing output and
consumers from investing in alternative energy sources.
Wider Influence
Still, higher oil prices will ripple throughout the economy
because oil is part of the cost of almost every other good sold,
economists said.
If oil passes $20, it will be a sign that inflation could
make a comeback and other investments, especially bonds, will
retreat, said Allan H. Meltzer, the chairman of the Shadow Open
Market Committee, a group of economists that follow actions of
the Federal Reserve.
Energy costs make up 6 percent of the Consumer Price Index,
but oil has a much wider impact because it increases costs for
other business activities, said Meltzer, professor of political
economy at Carnegie Mellon University in Pittsburgh.
A rise in energy costs has corresponded with higher
inflation 84 percent of the time in the past 30 years, according
to Paul Kasriel, chief economist at Northern Trust Securities in
Chicago.
At $20 a barrel, the bond market will be ''just a bit
shocked -- but we've been close to it already and we haven't seen
any noticeable sign of inflation,'' said Eugene X. Hodge, a
senior investment officer at John Hancock Mutual Life Insurance
Co., who co-manages a $2 billion oil and gas bond portfolio.
All this could be could be good news for Dost, the Oklahoma
oil company owner. The oil he produces, which is different from
West Texas intermediate, will fetch about $18 a barrel if WTI
trades at $20, and he'd like it if prices would stay right there.
''I'd like to think the OPEC felt the pain of the low
prices,'' he said. ''It's sad to say that those of us out here
will be lucky to find a little field that pays the bills.''
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