Edition: U.S. / Global

Look for Oil Prices to Fall, but Not Gasoline Prices

Published: May 21, 1996

The return of Iraq into the world oil market is expected to push crude oil prices down by $2 to $3 a barrel by the summer, analysts said yesterday.

The addition of as much as 700,000 barrels of Iraqi oil a day, coming at a time when some large oil producers have indicated that they will increase production, will eventually lead to a drop in oil prices, analysts said.

You won't see a price collapse," said Adam E. Sieminski, an oil industry analyst with NatWest Securities in Baltimore. "But it should bring oil prices down by $2 to $3 a barrel by the summer."

A decline in the price of crude by that amount could mean a decline of 4 or 5 cents a gallon in the wholesale price of gasoline, some analysts estimated. But it is uncertain whether drivers will see such a savings at the pump because surging demand for gasoline and refiners' problems in meeting it threaten to keep gasoline prices high, particularly this summer, the peak driving season.

The news that Iraq and the United Nations had reached an agreement on a limited sale of oil prompted a drop in crude oil prices on commodity markets. But prices soon moved sharply higher. On the New York Mercantile Exchange, crude oil for June delivery, the most active contract, ended the day at $22.48 a barrel, up $1.84.

The market had long anticipated an agreement on Iraqi oil, and traders attributed the sharp rise yesterday in part to technical factors, including the expiration of the June contract today. But the price of crude oil also reflects concerns about growing worldwide demand for oil products, particularly in the United States, where a surge in gasoline sales helped the industry to push through steep price increases in March and April.

Also keeping crude oil and wholesale gasoline prices high has been an industrywide trend by refiners to keep inventories of crude oil very low in an effort to save money. Any drop in crude would bring oil companies and other buyers into the market.

"The closer the price gets to $17 to $18 a barrel, the greater the desire on the part of companies to re-fill their nearly empty tanks," said Mr. Sieminski of Natwest Securities.

Analysts also noted that Iraq's re-entry into the market would add only about 700,000 barrels a day to world consumption, which totals about 70 million barrels a day and is expected to rise to about 72 million barrels later this year.

Nevertheless, many analysts said they expected that crude oil prices would eventually drop.

"I still think prices will go down," said John Lichtblau, the director of the Petroleum Industry Research Foundation, an industry consulting group, after expressing surprise that the commodity market had shrugged off the news. "Maybe the market is waiting for other things to happen."

Philip K. Verleger Jr., an oil consultant for Charles River Associates in Washington, said the pressure for crude oil prices to fall was building.

Saudi Arabia, the world's largest oil producer, has already indicated that it may increase its output and that it may push for increasing its quota at the next meeting of the Organization of Petroleum Exporting Countries set for June 5, Mr. Verleger said.

At a time of increasing demand, OPEC has kept its production quota at 26 million barrels, which has helped to keep up crude oil prices. Some analysts, however, said the quota would be kept the same because the Iraqi oil is coming to market and the OPEC members have been getting good prices.

The outlook for retail gasoline prices is more murky. Some analysts caution that if the demand for gasoline continues to remain high and refiners are straining their limits to produce, prices at the pump may still rise sharply during the height of the summer driving season.

"If demand is stronger than anticipated and if they continue to hold down inventories, we could some see some price spikes," said Mr. Verleger, the oil consultant.

The recent rise in gasoline prices has become a political issue. Bob Dole, the expected Republican Presidential candidate, has pushed to have Congress repeal the 4.3 cents a gallon gasoline tax passed to help reduce the deficit.

Some analysts, including Mr. Verleger, have said that repealing the tax would mostly benefit the oil companies since a tax cut is unlikely to have any effect on the price at the pump.