Oil Prices Appear to Have Peaked

OIL, everyone's favorite bogyman commodity of the 1970s, has been making waves on the stock and commodities markets recently, not to mention its effect on the inflation rate in the United States. In mid-March, oil prices shot up on reports of shrinking US inventories and rumors that Saudi Arabia was prepared to limit production and cut sales to Europe and the US. The April contract for West Texas Intermediate (WTI), closed up 48 cents at $19.77 on the New York Mercantile Exchange.

WTI is the main benchmark crude in the US. And not surprisingly, the jump in crude oil prices lifted oil stocks in general, including Chevron, Texaco, Du Pont (Conoco), Ashland, Arco, Mobil, British Petroleum, Unocal, and Royal Dutch Shell.

By the middle of last week, crude oil futures had closed above $20 a barrel, the first time that level had been reached on the Mercantile Exchange since mid-1987.

Were that upward price trend to continue, of course, there could be all kinds of consequences, such as higher prices helping to spur domestic drilling within the lower 48 states of the US, on the one hand, and potentially higher prices at the gas pump, and thus upward pressure on the inflation rate, on the other.

But there is an emerging view here that the current high in the $20 range for WTI is probably a peak, for now at least.

``I think that $20 is about it,'' says Rosario Ilacqua, an energy analyst with the Nikko Securities Company International Inc. ``Anything above that level would destroy everything that Saudi Arabia has sought to achieve.''

The target price for the Organization of Petroleum Exporting Countries (OPEC), Mr. Ilacqua, notes, is $18 a barrel. (That target price is roughly equivalent to $19.50 in terms of the price of West Texas intermediate.) Were the OPEC target price to go substantially higher than $18, Ilacqua says, then the two major objectives of OPEC would be negated: stable prices and ensuring a price level that allows OPEC to maintain its world market share.

The last time that prices shot up substantially, says Ilacqua, new producers suddenly appeared on the world scene. And, of course, that did not help OPEC keep its market share in relation to non-OPEC producers.

Ilacqua does see the OPEC target price going slightly higher later in the year, to about $19 (which would be about equal to $20.50 for WTI). He thinks that level will probably hold, given the eagerness of the Saudis to ensure market stability.

``The fundamentals are there to support the current price level,'' says Paul Ting, an oil analyst with Oppenheimer & Co. He bases his conclusion on three factors:

Demand is much stronger than expected.

Production is slightly above OPEC's quota of 18.5 million barrels a day, but not so high as to have a major impact on price, given the strong demand.

US inventory is lean.

Mr. Ting believes that price levels for crude would have to get into the mid-$20 range before there would be any real incentive for domestic US producers to start up or accelerate production within the continental US.

OPEC, says Ting, will have two crucial meetings that could have an impact on production schedules and price levels. OPEC's price monitoring compliance committee meets in Geneva March 29. And in June there will be a major meeting by OPEC nations.

Meantime, Ting is recommending a number of major domestic companies, including Arco, Chevron, and Amoco.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK