Oil price strategy is now in tatters

Press, 29 January 1986, Page 34

Oil price strategy is now in tatters

NZPA-Reuter New York O.P.E.C.’s strategy, adopted last month, to abandon price protection in favour of defending and extending its market share is in tatters, and oil prices have started to collapse. Oil industry officials and analysts say prices could drop through the SUSIS to SUSIB a barrel level foreseen by the Saudi Arabian Oil Minister, Ahmed Zaki Yamani. Analysts say even a move towards SUSIO is possible. In New York on Friday, United States crude prices fell 50c to $U519.40 a barrel. Prices on some foreign grades, such as North Sea Brent, weakened 35c to SUSIB.SO a barrel, down SUS 3 to SUS 4 irom the previous Friday. The failure of O.P.E.C. and non-O.P.E.C. producers to reduce output at a time when world markets are glutted is the key to the price collapse and any future rebound, analysts say. Mr G. Henry Schuler, director of energy studies at the Centre for Strategic and International Studies in Washington, said: “The Saudi strategy of preserving and extending its share of the market is an abject failure.

“It has not worked and is not going to work unless they go to $l5 a barrel and under. The market is unlikely to establish any objective floor until it reaches $lO a barrel.” Mr Mark French, of Philadelphia’s Wharton Econometrics, said that after the oil price collapse this week “the odds that spot prices could break toward the SUSIO a barrel level are greater than half.” But he added: “It is not very likely they would stabilise there and would probably move back up to about $lB a barrel.” Similar sentiments were expressed by analysts worldwide. Earlier this month, the Indonesian Mines and Energy Minister, Mr Subroto, the current O.P.E.C. chairman, said a collapse in world oil prices could not be ruled out this year but that a decline of smaller proportions was more likely. Japan was the scene of nervous trading last week, with sources saying there was no end in sight for the decline. “I see the market stabilising in a $l5 to $2O range, and after the current seasonal high-de-mand period finishes, they may stabilise closer

to the $l5 level,” said Shigeki Koyama of the Economic Research Institute for the Middle East.

Singapore trade sources said last week’s decline opened the possibility of a free fall with no bottom in sight, although analysts expected the floor price to be the cost of production in a marginal field in the North Sea. “That will be around $l2 to $l4 a barrel, and if prices continue to fall at the same pace as last week, that range will be reached at the end of this week,” a senior American banking official told Reuters.

But European analysts said they thought the downward spiral had run its course. They predicted prices would stay at their present levels at least until a crucial meeting by several O.P.E.C. members in Vienna on February 3. Oil industry officials and analysts see an O.P.E.C. agreement as critical because they discount the possibility that O.P.E.C. and non-O.P.E.C. nations could agree on a world wide plan to cut output.

O.P.E.C. is estimated to be producing 18.4 M barrels a day, well above the world wide demand for O.P.E.C. crude.