Crude Oil Prices Plummet in Wake of Saudi Move

BySue Masterman

V I E N N A,  Austria, July 5, 2000 -- Oil prices shed more ground today as dealers braced for extra oil from Saudi Arabia and a few fellow OPEC producers after Riyadh’s surprise vow to increase exports.

London Brent blend futures settled 20 cents lower at $29.35 a barrel having hit a low of $28.55. U.S. light crude was off $1.83 a barrel at $30.67.

The downward move came after Saudi Arabia announced its intention to put an extra half-million barrels per day onto the market very soon if prices do not sink toward a target of $25 per barrel.

The frenzied selloff on the New York Mercantile Exchange occurred on the first trading day after Monday’s announcement by the world’s leading oil-producing nation, which caught even fellow OPEC membersby surprise. The exchange was closed Tuesday in observance of the Independence Day holiday.

Prices for Other Fuels Fall

And in a development that bodes well for motorists complaining of soaring gasoline prices, other energy products also were knocked sharply lower by crude’s fall.

Prices of gasoline contracts dropped 7 percent and heating oil and natural gas contracts each dipped 4 percent, although such changes generally take a few weeks to affect the retail market.

Analysts say gasoline prices, which have soared largelybecause of crude’s ascent, could fall by a dime or more beforeLabor Day as a direct result of the Saudis’ decision — if it iscarried out.

“If the Saudis go ahead, we could see prices near $25 inSeptember,” said Anthony Karydakis, senior economist at Banc OneCapital Markets in Chicago. James Glassman, senioreconomist at Chase Securities in New York, agreed. “The Saudi decision will help bring prices down by fall andthis should help unwind some of the energy price pressures thatdrove up prices earlier this year,” he said. But some experts think even another 500,000 barrels a day will fail topush prices significantly lower. “It will stopthe heat from the market. It might bring the price down only by$1 or $2, maximum,” said Zaki Yamani, a former Saudi oil minister. “I would be surprised if it [falls] to $25 because the market needs much more oil.”

Master Plan?

The Saudi move was seen by analysts as a sign of determination to bring down oil prices “by hook or by crook.”

“Saudi Arabia obviously bent to U.S. pressure,” said Phil Flynn, an energy analyst for Alaron Trading Corp. in Chicago. “I think they realized that if the market didn’t get more oil, it was headed to $40 a barrel … and it would have risked harming world economies.”

Some see the Saudi move as part of a pre-determined strategy determined at last month’s meeting in Vienna.

There, the Organization of Petroleum Exporting Countries agreed to put an extra 708,000 barrels per day, or bpd, on the market from July 1 in hopes of taming soaring oil prices and bringing it back within a band between $28 and $22 a barrel.

It also refined an agreement on a mechanism to kick in if oil prices failed to drop below $28 for a period of more than 20 days. But OPEC’s move did not bring the oil price down. Instead, it continued to rise.

OPEC still blames tax and other mark-ups on oil refinery products for the high price of oil across the world. Half the price of gas in the United States is the result of taxes. In Europe, where consumers pay twice as much for gas and heating oil, taxes make up 80 percent of the price.

Sending a Message

The Saudi move sends a signal more important than the actual quantities involved, analysts say.

“The signal is quite clear. By hook or by crook, they’ll bring the price down,” said Mehdi Varzi, an analyst with Dresdner Kleinwort Benson in London.

He predicts relief at the pump “within weeks rather than months.”

Naji Abi Aad, an oil expert with the France-based Observetoire Mediterraneen d’Energie, thinks the Saudis are trying to talk the oil price down. The Saudi statement “aims above all to influence the oil price through the media,” he said.

David Knapp, a senior economist at the International Energy Agency in Paris, thinks the Saudi move could have been planned.

“This could well be the second part of a pre-planned strategy,” he said. “If prices had come down after the Vienna meeting, they probably wouldn’t have done anything.”

Jeremy Elden, an analyst at Lehman Brothers in London, put a damper on high hopes with a prediction that pump prices would fall no more than 11.5 cents on the gallon. The nature of Saudi oil meant it would have a bigger effect on heating oil prices, he said.

OPEC Rifts Reopened

The Saudi move has opened up old rifts within OPEC. Iran and Iraq condemned it, while Kuwait was miffed that it had not been consulted. Others, however, welcomed it warmly, with the United Arab Emirates saying it was ready to join the boost.

Saudi Oil Minister Ali al-Nuaimi has been working the phones to assure fellow OPEC members and executives that he will not move without consulting the others first.

Kuwait later said he had assured them they “would not take any decision to increase its production without consulting the others.”

Iran at first attacked the Saudi plan.

“There is no reason to violate OPEC agreements,” it said in a statement on the official IRNA news agency. But later, after a phone call from Riyadh, Iran’s oil minister said on television that he had received assurances that “there would be no unilateral decision.

‘Astonishing and Reprehensible’

Iraq, out on a limb and outside the OPEC agreement, slammed the Saudis.

“Saudi Arabia’s position is astonishing and reprehensible,” was the official word from Baghdad. Iraq said the it was all a U.S. plot.

The ailing King Fahd of Saudi Arabia himself picked up the phone and called Venezuelan Oil Minister Ali Rodriguez, who also serves as president of OPEC. Rodriguez, too, had been caught completely by surprise by the Saudi announcement.

There, too, ruffled feathers appear to have been smoothed with assurances of consultation.

Saudi Arabia is believed to have consulted only with Qatar and the UAE before it confirmed the plan to put the extra half-million barrels on the market “very soon.”

With the mechanism in place, no new OPEC meeting is needed to sanction the move. Nor is unanimous approval from the other OPEC countries.

The Associated Press and Reuters contributed to this report.

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