YOU ARE HERE: LAT HomeCollections

Saudi Warning of Oil at $15 a Barrel Shocks Markets

January 24, 1986|PAUL RICHTER | Times Staff Writer

NEW YORK — Saudi Arabia's oil minister, Sheik Ahmed Zaki Yamani, warned Thursday that the price of oil could fall below $15 a barrel with "adverse and dangerous" consequences for the world economy unless oil producers, both members and non-members of the Organization of Petroleum Exporting Countries, agree to limit production.

Yamani's remarks caused panic in world oil markets early Thursday, although prices recovered slightly later in the day. The price of the benchmark crude oil from the North Sea, which has fallen by a third in less than month, skidded another $2.10 a barrel to $17.70 in New York trading, before recovering to close at $18.30.

The nose dive, coming after a week of sharp drops, demonstrated for many the crucial role that the Saudis have been playing in the collapse of oil prices, and their apparent interest in keeping the price down until other producers agree to limit production.

Yamani "delivered a severe shock to the market, as he knew he would," said Michael Wilner, vice president and trader with Atkin Petroleum Inc. in New York. "The fact that he even said it shows that what's been happening is exactly what the Saudis want."

In an interview with OPEC's official news agency, Yamani said that without a worldwide agreement to limit production, "there will be no limitation to the downward price spiral which may bring crude prices to less than $15 a barrel, with adverse and dangerous consequences for the whole world economy."

Two key audiences for his remarks were the British and the Norwegians, non-members of OPEC who have helped depress oil prices by continuing heavy production in the North Sea despite a growing glut of oil on the market.

In the interview, Yamani described as a "pragmatic and realistic approach" Norwegian Oil Minister Kaare Kristiansen's comment Wednesday that Norway would cut production if others did the same.

But Yamani said a similar resolve is needed from the British, who have signaled their determination to continue heavy production. He rejected the suggestion that Saudi Arabia, an OPEC member, resume its former role as "swing producer"--the country that takes the lead in cutting back output as needed to support world oil prices.

After limiting production to 2.2 million barrels a day in 1984 and 1985 in hopes of maintaining prices, Saudi Arabia last fall reversed itself and began the confrontational course that has hastened oil's downward spiral, analysts say. It cranked up production to its current 4.5 million barrels and began offering so-called netback deals to customers to help it win a larger share of a the world's shrinking oil market.

Such deals have been more attractive to buyers in the current glutted market because the oil's price is set at the time of delivery to the refinery, rather than as the petroleum is loaded onto ships. The purchaser stands less risk of losing money if the price declines between the time the oil is transferred from the ship to the refinery.

Since the beginning of December, such other oil producers as Iran and Nigeria have followed Saudi Arabia's lead, offering more and more netback deals.

Analysts believe that the Saudis' actions are intended to increase the level of financial pain for oil producers to the point where all will agree to production quotas that would effectively give OPEC a greater market share.

"You've got to understand that the Saudis will still be making money when the price falls to $4 a barrel," said Joel Faber, president and trader with the New York trading firm of Faber's Futures Inc. "They can still hang in there for a long, long time."

Experts said the Saudis may hope to have to hold on no longer than Feb. 3, when OPEC members are scheduled to meet in Vienna to discuss the setting of production quotas.

Continuing Trend

Several oil-producing nations signaled Thursday that they would continue the price-cutting trend in hopes of maintaining their market shares.

Ecuadorean Energy and Mines Minister Javier Espinosa Velez said that his country will for the first time price its oil based on international rates and will begin selling as much petroleum as possible, rather than setting aside a portion, as it has in the past. Ecuador, an OPEC member, is nominally bound by its price guidelines.

Non-OPEC member Mexico, meanwhile, said Thursday that at the end of this month, it will retroactively cut the prices of the oil it sells during the month. Mexican officials also declined to say whether they would agree to limit output. Their British counterparts, meanwhile, repeated their determination to continue heavy production.

The top U.S. crude, called West Texas Intermediate, was priced at $19.77 a barrel in contracts for March delivery, down from Wednesday's $20.39, but up from an opening of $18.75.

Los Angeles Times Articles