|
Oil deal pushes prices up
|
 |
March 23, 1998: 4:11 p.m. ET
Crude prices rise, transportation shares fall; some doubt pact will stick
|
NEW YORK (CNNfn) - Oil shares climbed and transportation shares slumped on news that three leading oil nations have pledged to cut production by up to 2 million barrels a day.
Analysts say the move doesn't necessarily mean oil prices will go higher and could even turn out to be a positive step.
World benchmark Brent North Sea crude was trading $1.88 higher at $15.12 a barrel Monday afternoon in New York. Last week, oil prices plunged to under $12 a barrel, fueled by a spate of overproduction and depressed demand from Asia.
The spike came after Venezuela, Saudi Arabia and Mexico pledged after secret talks over the weekend to cut their production of crude oil to reverse a steep decline in oil prices.
The news pushed up the oil issues included in the Dow Jones industrial average. Chevron (CHV) was up 1 to 87-7/8 and Exxon (XON) up 1-7/8 to 69.
Transportation shares were pushed lower over concern that airlines may face higher fuel prices, further squeezing their bottom line. American Airlines parent AMR Corp. (AMR) was off 1 to 138-13/16, Southwest Airlines (LUV) was off 1-1/4 to 28-7/8, and United Airlines parent UAL Corp. (UAL) was off 1-3/8 to 88-1/2.
The early price surge, however, belies a more pressing issue for many analysts: whether the stated commitment to boost prices by cutting supplies signals a newfound solidarity among producers or simply another feint at cohesion that can't hold up under the test of time and fractious oil politics.
"We have the old question that we always have: Is this agreement going to be adhered to? And, of course, when questions in that area come up, most {analysts] often point or look to Venezuela to see if they will in fact keep the agreement," said Bill O'Neill, director of futures research at Merrill Lynch.
Lynch said it will take at least two weeks to know whether the deal will stick. (323K WAV) or (323K AIFF)
However, he said the decision won't be that detrimental to consumers since the production cut translates into a price hike of about $2 a barrel.
"It's not going to be that much of a negative for the consumers. After all, they're paying much lower prices than we've paid for six months... (It) might actually make everybody a winner n the sense that it could create a little stability in the market," Lynch said.
Jim Placke of Cambridge Energy Resources Associates said oil producers and consumers need to get together and determine the best price situation for both.
"I think it's better for producers and consumers if there's a reasonable degree of stability about supplies and about prices and I think that's what this agreement potentially promises," Placke said.
Michael Rothman, senior energy analyst at Merrill Lynch, said whether or not gas prices will head up depends on whether crude oil prices remain stable.
"About 85 percent of the spot price of gasoline is in fact a function of crude oil prices, so if crude oil prices stay at these levels, there is likely to be some increase in pump prices, perhaps by a nickel. Beyond that is questionable," he said.
The pact, to be sure, was hammered out beyond the formal framework of the Organization of Petroleum Exporting Countries, an eleven-nation consortium that coordinates oil prices in order to help stabilize the market and ensure a reasonable rate of return for oil producers. The negotiators thereby avoided the internal political donnybrooks that are a hallmark of OPEC meetings.
After Venezuela, Saudi Arabia and Mexico -- a non-OPEC member -- struck their deal in the Saudi Arabian capital of Riyadh, the ministers at the talks expressed confidence that the pact would draw both OPEC insiders and outsiders into their crude-cutting fold.
On Monday, early signs suggested that their optimism was not entirely misplaced. Of the 11 OPEC members, seven expressed willingness to cut output in line with the Riyadh assumptions. Among the hold-outs, Qatar and Iran both agreed to cut output, but by less than the Riyadh pact assumed. Qatar said it would cut production by 20,000 barrels -- significantly below the 50,000 requested at Riyadh -- in order "to prop up prices and restore stability in the market", according to one official.
Iran, another OPEC member, also stopped short of the 200,000 barrel-per-day cut the Riyadh pact sought, agreeing instead to curb output to 140,000 barrels daily by April 1. Indonesia announced it was ready to cut output, but said it had yet to determine how much.
Nigeria, while insisting it was a "responsible" OPEC member, declined to say how much -- if any -- oil it would cut.
Among major non-OPEC members, only Mexico had firmly stated its commitment to the cuts. Oman agreed to cut 30,000 barrels a day, versus the 50,000 written into the Riyadh agreement. Norway, meanwhile, said Monday it has yet to be approached by OPEC or non-OPEC nations to join the deal. The agreement reportedly calls for Norway to reduce its crude production by 100,000 barrels a day below current levels of 3.2 million barrels.
Brunei, a non-OPEC member that exports only 160,000 barrels of crude a day, said it would not cut further into its already low production.
Oil prices, fed by increased production from certain oil producing nations, have fallen sharply from $23 in October to a low of $12.80 a barrel early last week.
That glut of oil and unseasonably mild winter weather in the Northeast United States have conspired to help push gasoline prices down below $1 per gallon in many regions.
The Organization of Petroleum Exporting Countries has tried vainly over the past months to rein in production. But those efforts have been blunted as some member nations, particularly Venezuela, flouted the quotas.
OPEC, analysts say, has been reluctant in the past to unilaterally cut production for fear that non-OPEC producers would continue to pump oil at high levels, largely negating the impact of the cuts.
Currently, worldwide production totals 75 million barrels a day. Should prices rise by about $4 a barrel, according to some analysts, gasoline prices at the pump would rise 10 cents a gallon. Schroder Capital Management Inc. predicted that oil would rise $1.50 to $2, to $17 a barrel after the output deal.
The next phase of the deal will be to monitor the cohesion of the agreement. Quota-bucking is not unusual among oil-producing nations. The targeted cuts in output are slated to take effect April 1, and markets will be keeping a vigilant eye on how much production actually falls.
The general sentiment this time around is that nations inside and outside OPEC are committed to the new production-cutting regimen.
The European Union's executive body said it would discuss the oil cuts at its weekly meeting Wednesday in Brussels.
OPEC currently supplies more than 40 percent of the world's oil and controls about 78 percent of the world's proven reserves of crude oil.
|
|
|
|
|
 |
|
