OPEC disappoints, oil slides
Prices decline as OPEC meeting, mild conditions, glut add to sense of gloom
NEW YORK (CNNfn) - Oil prices tumbled sharply Monday as the market reacted with disappointment to the Organization of Petroleum Exporting Countries' failure to agree on a deal to soak up a global glut.
OPEC ministers at a meeting in Vienna last week failed to extend existing output cuts and instead postponed any decision on production policy until next March.
The news sent oil prices tumbling to their lowest level in more than 12 years Monday with the January light sweet crude oil futures contract sliding to $11.15 Monday afternoon, down 71 cents.
Earlier, the crude-oil contract fell to $10.82 a barrel, marking the lowest intraday trade since July 27, 1986 when it fell to $10.65 a barrel. The last time crude oil closed below $11 a barrel was on July 25, 1986 when it hit $10.90. The all-time intraday low for crude-oil futures in New York was $9.75 a barrel set on April 1, 1986.
"They didn't do anything, and the market viewed that as bearish and rightly so," Jim Ritterbusch, an oil trader for Chicago-based Sweeney Oil, said. "There's currently no sign of support underneath this market."
Price decline sparks urge to merge
The continued decline in oil prices has pushed many analysts to slash earnings estimates of oil companies. Goldman Sachs, for example, cut its 1999 forecast for Mobil Corp. (MOB) by 53 cents a share.
In a related development, Deutsche Bank sharply lowered its 1999 oil price forecast to $14.50 per barrel from $16 and said it would continue to sell most oil holdings across the board.
The steep decline in oil prices has led to increased pressure among oil companies to find ways to cut costs, either through layoffs or mergers.
On Friday, the nation's two largest oil companies, Mobil and Exxon , stunned investors by confirming they are in talks to combine in a deal that analysts say could be the largest merger in history.
"As you're looking for new earnings growth opportunities, one way to accomplish that is by merging, which provides better opportunities toward those costs," Guy Fliakos, oil analyst with Merrill Lynch, told CNNfn's "Business Day.
Buying oil stocks is a risky business
Deciding whether to invest in oil given the price battering requires a view to the long-term, Fliakos said.
"I wouldn't buy the oil stocks based on today's conditions. I mean, there should be some anticipation. My feeling has been that there's simply too much despair about oil prices," Fliakos said.
But, he added, "I think the price of oil is going to recover to the high teens. And on the basis of high teens, you get much more robust earnings, and I think the stocks should be selling at a market multiple. So I think on fundamentals, based on my scenario of an improved recovery, you can make a good case for owning these stocks."
Oil's prospects in the near-term
However, other analysts said bulging oil inventories, a mild winter and a divided OPEC could push prices even lower with no immediate reversal to the slump in sight.
"There's no fear of supply shortage whatsoever," said Peter Bogin, associate director of Cambridge Energy Research in Paris. "There's nothing out there giving the slightest hint that the supply and demand balance could tighten in the near term."
Traders are hard-pressed to find any good news in the oil market. Inventories are high and a mild fall season in the United States has dampened demand, analysts said.
"It's a buyers' market," Bogin said.
Analysts said only cold Arctic air moving into the northeastern United States, which would spur demand for heating oil, or a major supply disruption could pull oil prices out of basement levels.
Where OPEC may go from here
Last week, OPEC ministers met but shied away from taking any action to boost prices. Bitter rivalries among members -- most notably among Saudi Arabia, Venezuela and Iran -- have divided the once-powerful cartel, analysts said.
On Sunday, the United Arab Emirates oil minister called on Iran and Venezuela to stick by their pledged production curbs.
"I think it is in their interest to cooperate to reach a consensus with the others," UAE Minister of Petroleum and Mineral Resources Obeid bin Saif al-Nasseri told reporters. "Without cooperation among countries, there will be no agreement and that will rule out any improvement."
OPEC's 11 members meet again in March to consider options, which may include making more production cuts.
Kuwaiti Oil Minister Sheikh Saud al-Sabah said Saturday that he feared prices could plunge to the $5 to $7 a barrel range.
"I am afraid that oil prices will deteriorate in the coming months," he said on his return from Vienna where OPEC held its winter meeting.
The minister said producers needed to reduce output by an additional 1.5 million barrels a day to rescue prices.
Also weighing on the market is the likelihood that Iraqi exports would resume shortly after Baghdad agreed to a fifth round of the "oil-for-food" deal with the United Nations.
"There will be hardly any interruption of Iraqi exports," Bogin said. "In fact, you can expect Iraqi exports to start increasing in the second quarter of next year."
-- from staff and wire reports