Wall Street strategists have eyes trained on Middle East. Iran-Iraq battle lines pose key test for oil prices

By , Staff writer of The Christian Science Monitor

Halfway around the world, in the muggy, swamp-ridden alluvial plains just north of the Persian Gulf, lies Basra. Not terribly remarkable as cities go. But for Mideast battle commanders and New York investment strategists, Basra holds enormous significance.

In Iraq, the torrid summer heat is giving way to autumnal temperatures more condusive to fighting.

This week Iraq and Iran mark six tragic years of war, and Iran appears on the verge of mounting yet another well-publicized ``final offensive.'' Satellite photos show an Iranian Army, half a million strong, amassing east of Basra.

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But unlike previous battles, analysts say Iran's new military hardware and a determination born of a severely foundering economy could tip the balance in its favor. If Iran is victorious at Basra, oil prices are likely to go higher. And that has caught Wall Street's attention.

``The importance of Iran's drive on Basra should not be underestimated,'' writes J. Paul Horne, Paris-based economist with Smith Barney, Harris Upham & Co.

Basra sits astride the road supplying Baghdad with arms from Kuwait. Alongside the highway runs a pipeline going north from a major oil field just west of the city.

``If Basra falls, Iran would gain control of the city, highway, pipeline, and almost half of Iraq's oil capacity,'' Mr. Horne notes.

Fresh fighting could mean increased disruption of oil shipments through the Persian Gulf. An Iraqi air raid last month on Sirri Island shows that Iraq is capable of striking anywhere in the Gulf.

Wall Street is so sensitive to this situation that just the news of a full-blown Iranian offensive could pump up oil stock prices another 10 percent, says Earl J. Gaskins, energy analyst and portfolio manager at Provident Capital Management in Philadelphia.

Crude prices and oil stocks bounced 10 to 15 percent last month on news of a temporary agreement (fostered by Iran) that limits production by the Organization of Petroleum Exporting Countries.

And if Iran emerged from an autumn offensive victorious, it would ``be able to exert more influence over pricing. Their strategy, contrary to the Saudis, is to manage production in order to keep oil prices high,'' Mr. Gaskins notes.

How high could crude climb?

A Cyrus J. Lawrence & Co. oil analyst, Frederick P. Leuffer, figures a victory at Basra could push per-barrel petroleum prices to the mid-$20 range and past $30 next year.

Ultimately, higher oil prices might help bring back inflation.

Smith Barney's director of economic and investment policy, William W. Helman, says that could stunt economic growth, hurting the stock and bond markets.

Indeed, this past week bonds tumbled when inflationary fears were ignited by rising commodity prices.

But on second thought, investors decided a little inflation might portend a stronger economy, and they sent the stock market averages to new highs. (See accompanying story on this page.)

The warnings about a battle at Basra pale next to such investor optimism. Indeed, while closely monitoring the Iraq-Iran war, analysts say the odds favor lower oil prices several months from now.

Mr. Leuffer points to the fragility of the two-month OPEC agreement to limit production and boost prices. When the pact comes up for renewal Oct. 6, he predicts, the Saudis will be forcing the kinds of issues that torpedoed past OPEC meetings.

Leuffer also thinks OPEC members will cheat on their production quotas as they have in the past, thus breaking the agreement.

He concludes, ``The odds are that oil prices will remain low, averaging $15 per barrel in 1986, 1987, and possibly 1988.''

Mr. Gaskins at Provident suggests oil will fall from about $16 a barrel now to about $12 in coming months, assuming the Iranian offensive fails to materialize or simply fails.

He notes that OPEC production soared to an average of 21 million barrels per day in August. Therefore, OPEC heads into this curtailed production period with bloated inventories.

Gaskins's figures that demand may not even amount to the 16.7 million-b.p.d. production limit OPEC agreed upon.

``The bias over the near term is down,'' he says.

Both analysts warn that most oil stocks are now fundamentally overpriced. Even so, oil issues continued to rise last week as money managers rushed to get stocks of this underweighted but top-performing group into their portfolios.

Also, Iranian forces mounted several attacks last week, but it was unclear at press time whether a full-scale offensive was under way.

``Exxon, Royal Dutch, Mobil, and Amoco are selling at prices which reflect oil in excess of $20 per barrel,'' warns Gaskins, who's been taking some profits in oil stocks lately.

``Mobil is selling at $38 a share,'' he says. ``That's higher than last year's high of $36, when oil was selling at $28 a barrel.''

Assuming $15-a-barrel prices, Leuffer sees a takeover scenario developing. ``The next two to 2 years will provide a window of opportunity to buy oil and gas reserves cheaply,'' he writes in a recent report on oil properties.

Leuffer thinks Standard Oil will be snapped up. And he favors Arco and Royal Dutch/Shell for their yields and financial stability.

Beyond that two-year window, analysts expect oil prices to rise. But an Iranian victory at Basra means that ``all bets are off,'' says Gaskins.

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