Prospect of slipping prices has Big Oil shifting gears
As a result of OPEC's inability to agree on a pricing structure, the oil industry is preparing to make some significant changes.Skip to next paragraph
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* Oil companies now plan to buy more crude oil on the world spot markets instead of rounding up supplies by means of long-term contracts.
* Exploration for new supplies of oil will be reexamined using a new factor: cost. If the price of oil continues to fall, drilling on many marginal prospects will be scrubbed.
* Marketing of oil will continue to be aggressive, which may have some ramifications as to who stays in the refining business.
These are some of the major trends oil industry executives and analysts see developing in the wake of the recent inconclusive meeting held in Geneva by the Organization of Petroleum Exporting Countries. Although some of the trends were already in effect, they will now be reinforced.
For example, oil companies had already been buying more crude on the spot markets. But from interviews with company executives, most of whom prefer not to be identified, it is clear they now intend to buy less oil through term contracts. One executive at a major company explained, ''As the contracts come due, we will renew them for less crude than we were taking and purchase whatever else we need on the spot market.''
About 5 percent of all oil buying now takes place in the spot market. The executives indicate, however, that they would not be surprised to see that swell to 10 to 15 percent in the months ahead. Currently, the spot markets are quiet. One executive said this was the result of the uncertainties hanging over the markets. ''People are willing to draw down inventories,'' he commented, ''and wait to see what happens.''
There are ramifications of increased purchases on the spot market. Aivars Krasts, vice-president for coordination and planning at the Stamford, Conn.-based Conoco, says more use of the spot market may result in increased volatility and wider swings in price. ''In the past, the price of oil has moved stepwise,'' he commented.''Now it may be in a more sawtooth pattern.''
Prices will react much more sharply to supply and demand, another executive said. This will make planning - an important function at oil companies - more difficult. The price swings will apparently be most beneficial to companies that are agile traders and can most quickly take advantage of price differentials.
Without exception, oil company analysts expect to see the price drift lower. Exactly how much is the subject of some debate. One major company said it was planning to pay $26 to $28 a barrel for Saudi Arabian light crude over the next six months. Another said the consensus in his company was that the price would fall at least $2 a barrel, indicating a $28-a-barrel level.
Another executive, whose job is planning when to buy oil for a major oil company, said this erosion was good for the industry. ''Oil priced at $34 per barrel was too high,'' he commented, ''and demand went away too fast. My own view is that if OPEC had held together and tried to maintain too high a crude price, it could have led to chaos.'' Specifically, he feels oil will slip to $20 a barrel before moving back to $26 later in the year. ''The reality is, they couldn't have held $34 per barrel even if they all agreed to it,'' he said.