OPEC disarray seen as two-edged sword
OPEC would hardly be cast in the role of the Grinch who stole Christmas. Analysts say the Organization of Petroleum Exporting Countries is less cohesive than it has been in a year, as some of its 13 members overproduce, discount prices, and choose sides in the Iran-Iraq war. ``OPEC is in more disarray now than in the past 12 months,'' says Everett Titus, oil and oil service analyst at Tucker, Anthony & R.L. Day Inc. in New York.
OPEC two weeks ago wrapped up a meeting in Austria that reinforced this claim. Analysts have concluded that OPEC's accord would not greatly reduce the world's oversupply of crude oil, because OPEC did not take any concrete action to do so.
The cartel did agree to maintain the $18-a-barrel price by limiting production to 15.06 million barrels a day. OPEC produces between 18.5 million and 19 million barrels a day, while its official quota is 16.6 million barrels a day.
Oil is selling in the range of $15 to $16 a barrel. In contrast, 1981 prices reached a high of $35 a barrel. OPEC's share of the world market has dwindled from 66 percent in 1979 to less than 30 percent, with Britain, Norway, the Soviet Union, and the United States producing more. Mr. Titus estimates that OPEC is producing between 55 percent and 60 percent of its capacity.
OPEC's activity spills over into many arenas, resulting in benefits to consumers and the stock market, and drawbacks - such as volatility and lower prices - for companies and countries.
On the positive side, the lower oil prices have been part of the reason the stock market has risen in the last few weeks. Last week the Dow Jones industrial average closed up 24.37 points to 1,999.67. The week before the Dow jumped 108.26 points.
Consumers feel the benefit of lower prices at gas pumps. Titus says that in the short term, fuel oil and gas prices could come down by as much as 10 cents a gallon.
In addition, certain industries clearly benefit from the lower prices, particularly airlines, chemicals, and agriculture.
Traditionally, falling oil prices also ease concerns about inflation, although this conclusion may now be more imagined than real, Titus says, because of the condition OPEC is in.
This perception underscores one of the uncertainties of the oil world. If OPEC decides to cut production, prices could stabilize and the picture could change, says Paul Ting, oil analyst at Oppenheimer & Co., New York. ``OPEC's disarray may reverse itself quickly. OPEC is considering cutting production by 1 million barrels a day, which would would reverse the feeling of weakness in the oil market.''
The price of oil reached $21 a barrel in July, is now selling above $15 a barrel, and may go as low as $12 a barrel. ``The uncertainty surrounding oil prices will not help any group in the short run,'' Mr. Ting says. He thinks oil will sell around $16 a barrel.
A dramatic example of oil-price volatility occurred last Tuesday, when prices for February oil contracts leaped by as much as $1.21, to $16.61 a barrel. Traders were responding to reports and rumors of a production cutback and the possibility that OPEC would call a special meeting.
Still, Tuesday's gains, the highest in 16 months, did not result from a change in supply and demand; these gains could be negated just as fast if OPEC does not live up to the expectations.
And, despite the increase, prices are still $2 a barrel lower than before the OPEC meeting. ``Oil prices are so volatile because of expectations and speculations on what OPEC will do,'' Ting says.
Another drawback of lower oil prices is that they lead to the postponement of non-OPEC, free-world production and the bringing on of new fields, particularly in South America and Indonesia, Titus says.
Declining oil prices also can act as a two-edged sword. Although falling prices have boosted the Dow, not all oil stocks benefit, because a continued decline in prices generally cuts into profits of oil companies.
``If you want to be in the market, one safe place to put your money is oil stocks in the large integrated companies that are relatively well capitalized and have strong cash flows,'' says Sanford Margoshes, international oil analyst with Shearson Lehman Brothers in New York.
Titus of Tucker, Anthony says some attractive values exist, partly because of the October stock market collapse and because oil service stocks are selling close to their previous price lows. He also cites as an advantage the outlook for domestic natural gas, which has finally turned positive. ``If oil prices don't break $15 a barrel, then prices on the spot gas market in 1988 will be higher than in 1987,'' he says.
Given the volatility in the oil market, Mr. Margoshes says he is sanguine about the outlook for prices in 1988, for five reasons. First, King Fahd of Saudi Arabia, the world's leading oil exporter, is committed to a price of $18 a barrel. Second, the 1986 price collapse is still very fresh in OPEC members' minds, when oil hit $10 a barrel.
Third, OPEC, particularly the Saudis, do not want to call a special meeting; they'd prefer to work out problems through phone calls.
Fourth, moves are afoot to tighten production. ``There's restraint from Iraq, Kuwait, and the United Arab Emirates,'' three chronic overproducers, he says, as well as Saudi Arabia and Iran.
Last Tuesday, the respected newsletter the Middle East Economic Survey said that the UAE, Kuwait, and Iraq would cut their production by 700,000 barrels a day.
The final reason Margoshes lists is Iran. ``The Iranians are spoilers: What they cannot achieve at collective bargaining, they may try through sabotage.''
He thinks another $2 will be added to the pre-OPEC meeting price. ``The expectation is for higher prices rather than a straight line of prices,'' he says.