Oil outlook cheery -- for the consumer
The outlook for the oil business is providing little holiday cheer in executive suites. But the prospect of flat or falling oil prices in 1983 will likely help consumers planning their budgets for the new year.
This year, weak economic conditions and consumer conservation efforts pushed down demand for petroleum products. Prices sagged as producers scrambled for the available business.
And for producers, the outlook for 1983 is far from rosy. With the world economy still reeling from the recession, demand for oil products is expected to be nearly flat, while production is expected to climb marginally as a result of increased pumping in Mexico and the North Sea. Meanwhile, members of the Organization of Petroleum Exporting Countries (OPEC) are using only two-thirds of their production capacity.
''The oil glut shows no signs of going away,'' notes Robert Wrenn, vice-president of Tucker Anthony Management Company, a brokerage firm.
Given low demand and excess production capacity, ''It is safe to say you won't get any (major) price increases'' in crude oil, says an executive at a major oil company, who asked not to be identified. ''And even a flat price is a real cut'' in what oil costs consumers, after factoring in inflation, he adds.
Of course, prices of products derived from crude oil will fluctuate, depending on prevailing conditions in individual markets. But flat crude costs are expected to dampen price moves.
For example, heating oil prices ''should be essentially the same this winter as last,'' says C. William Skinner, an official of the Energy Information Administration.
Fuel oil prices surged 6.4 percent in November, helping push up overall producer prices 0.6 percent, with dealers rushing to restock inventories as temperatures dropped. But over the last couple of weeks, fuel oil prices have moderated as stocks have risen, counter to normal seasonal trends. On Dec. 10, fuel oil in the spot (or wholesale cash) market was selling for 88 cents a gallon, vs. 98 cents on the same day in 1981.
Unleaded regular gasoline is currently selling in the spot market for 883/4 cents a gallon, vs. 953/4 cents a year ago. During November, gasoline prices inched up 1.1 percent. But the increase probably wasn't visible at gas pumps, since the climb resulted from seasonal adjustment of the index. Prices were declining, but not as much as normal.
During 1983, average gasoline prices are expected to rise 2 to 4 cents a gallon before the proposed 5-cent-a-gallon federal road repair tax is added, industry analysts say.
''We are at the bottom of gasoline prices. We are at an uneconomical level,'' says an executive at a second major oil company, who also asked not to be named.
There is an outside possibility the supply and price outlook could change significantly when OPEC ministers meet Dec. 19 in Vienna. The cartel has been in disarray, with some members - including Iran, Libya, Nigeria, and Venezuela - exceeding their production quotas and cutting prices. As a result, oil traders say OPEC oil can be purchased for up to $5 under the official $34-a-barrel price for Saudi Arabian light crude.
Saudi Arabia has cut its production from 10 million barrels a day to about 6 million to keep the price from collapsing further. And the Saudi oil minister, Sheikh Ahmad Zaki Yamani, has called for an end to discounting and the reestablishment of firm production quotas. The implicit threat is that Saudi Arabia could use its vast oil and financial resources to punish other OPEC members by lowering its price.
An OPEC price war next year ''is a possibility but not a probability,'' says John H. Lichtblau, president of the Petroleum Industry Research Foundation. ''But it will not happen as a result of the meeting Dec. 19.''
Oil executives cite various reasons the coming OPEC meeting is not likely to take definitive action. With the onset of winter, ''European demands are jumping up a lot,'' an oil executive says, easing the pressure on prices. This official adds that oil users are slowing their drawdown of oil inventories, which tends to firm up demand and reduce the pressure on prices.
But the executive notes that it will be harder for OPEC to patch over its problems in the spring, when demand for oil usually falls. ''Winter assuages the problem of demand. When it is over, things will be much worse. What bothers everyone is that we are coming into winter with soft prices.''
Industry executives, not surprisingly, argue that a major price break would be a mixed blessing. ''It could set off the bankruptcy of several countries,'' says one oil company executive. And a major reduction in prices would also trigger a considerable slowdown in exploration for new energy sources, increasing American dependence on other sources, including those in the Middle East.
US dependence on OPEC has come down sharply. In 1977, 70 percent of the 8.8 million barrels a day imported into the US came from the cartel. During the first eight months of this year, 44 percent of US imports of 5.0 million barrels a day came from OPEC, according to Mr. Lichtblau.
Barring a major break in crude oil prices, he does not expect OPEC's share of the US market to fall further. ''If there is any increase in imports, it may well come from OPEC countries,'' he said.
The US Energy Information Administration expects US energy demand next year to be about the same as this year, or 15.4 million barrels a day. A forecast of flat demand coupled with excess supply does not make oil stocks appealing, argues Mr. Wrenn at Tucker Anthony. ''I cannot find a fundamental case for them , although recently they have acted a little better.''
But some analysts believe oil stocks have been oversold. ''We have been recommending them on the basis that they are grossly undervalued and have not participated in this spectacular stock market move,'' says Constantine D. Fliakos, a Merrill Lynch oil analyst. He cautions that his buy recommendation asssumes that ''oil prices are not going to break.''