U.S. OIL PRICES STRONG AHEAD OF OPEC MEETING
U.S. crude oil prices are at their
highest level in more than a year ahead of next week's OPEC
meeting, even though most industry analysts do not expect any
policy changes from the session.
    They said prices, which have steadily climbed since the
organization's accord in December, have risen on technical
factors within the market and concerns about supplies because
of the Iran-Iraq war, which could disrupt deliveries from the
Gulf.
    The U.S. benchmark crude West Texas Intermediate is trading
around 20.55 dlrs in the July contract on New York Mercantile
Exchange's energy futures and in the spot market. That is its
highest level since January 1986.
    OPEC conference president Rilwanu Lukman, who is Nigeria's
oil minister, said Friday he expects the meeting in Vienna to
be brief and calm and that OPEC's current price and production
agreement may only need a slight review.
    Although most industry experts expect just a reaffirmation
of the December agreement, oil prices continue to climb due to
a desire to hedge positions in case of any surprises.
    Analysts expect the higher prices to continue until soon
after the OPEC meeting. At that point, barring any increased
tension in the Gulf or changes in OPEC's policies, prices
should begin easing.
    "OPEC will probably not do anything it hasn't already agreed
to in December because oil prices are firm," said John Hill, a
vice president at Merrill Lynch Futures.
    OPEC agreed in December to maintain official oil prices at
18 dlrs a barrel and raise the group's production ceiling to
16.6 mln barrels per day in the third quarter and to 18.3 mln
barrels in the fourth quarter.
    This agreement helped send prices sharply higher, rising
from 15 dlrs a barrel in early December.
    Several OPEC members who are price hawks, including Iran,
Algeria and Libya, will seek a higher official price and a
reduction in output.
    "And if U.S. West Texas Intermediate crude continues to
trade above 20 dlrs a barrel, there is a greater chance that
OPEC will raise its official 18 dlrs price," said Nauman
Barakat, analyst at Smith Barney, Harris Upham and Co.
    But most analysts expect the more moderate producers, such
as Saudi Arabia, to block any changes in policy.
    "The meeting will be a non-event with no change in the
official prices because OPEC, and in particular the Saudis, are
committed to stabilizing the market," said Rosario Ilacqua,
analyst with L.F. Rothschild.
    However, some analysts said OPEC may need to hold a meeting
in September to re-evaluate market conditions.
    Overproduction by OPEC will become a real problem in the
fourth quarter when the quota is raised to 18.3 mln barrels a
day and Iraq's pipeline through Turkey brings another 500,000
barrels to the market each day, said John Lichtblau, president
of Petroleum Industry Ressearch Foundation.
    Most expect Saudi Arabia to oppose a price increase at this
meeting but many look for an increase by year-end to 20 dlrs to
offset the decline in the dollar. Oil prices are denominated
throughout the world in dollars, so as the currency declines,
producers receive less money for their oil.
    "The only real production restraint in OPEC is Saudi Arabia,"
said Sanford Margoshes, analyst at Shearson Lehman Brothers.
    "In the second half of the year we expect the Saudis not to
produce at their 4.1 mln barrel a day quota and therefore act
as a vehicle to stablize the market and pave the way for a two
dlrs a barrel price increase at the December 1987 meeting," he
said.
    One uncertain factor is the course of the Iran-Iraq war.
    "The wild card is the increased tensions in the Persian
Gulf," said Frank Knuettel, analyst with Prudential-Bache
Securites.
    Oil tankers taking oil from Iraq and Kuwait have been
regular targets for Iranian planes. The Reagan administration
is planning to put Kuwait tankers under the protection of the
U.S. flag, with naval escorts.
    "Extra (oil) inventories are needed during a time of crisis
like this, and just general nervousness over an incident that
could disrupt oil supplies drives prices up," Knuettel said.
 Reuter
