WEATHERING ANOTHER PRICE SLUMP

The absence of panic is palpable. The crude oil market has been pounded soft again this year by overproducing members of the Organization of Petroleum Exporting Countries. Yet, by most visible signs, oil industry operations most vulnerable to a price slump hum right along. However welcome the calm, some less visible signs should raise concerns.

Crude oil prices have plodded steadily downward since the beginning of the year. Compared with their mid-1989 levels, official OPEC prices are down nearly 16%, West Texas intermediate futures prices down more than 17%. Yet Baker Hughes Inc. rig counts show year-to-year gains internationally and in the U.S., where the July 2 tally of 955 was up 22% from a year earlier.

THE METTLE TEST

So drilling decision makers are passing the mettle test. They seem not to have abandoned the view that crude oil prices will fluctuate within a $6-7/bbl range until the market strengthens fundamentally in 2-5 years. They treat prices at the low end of the range as inevitable but temporary, uncomfortable but worth enduring.

But the mettle test may last awhile. OPEC continues to produce too much crude, inventories of which are swelling despite relative product market strength. The 15-18% crude price slump from last year contrasts with 56% gains in spot gasoline and heating oil prices in the U.S. and Europe. This refiner's paradise can't last. In fact, U.S. demand for light products has skidded recently; product prices will follow. If OPEC had any realistic chance to raise crude prices with production cuts this year, it is vanishing rapidly. The group's challenge now is to arrest the price slide and hope eventual product price declines revive demand.

The upstream squeeze will become especially tight in the U.S., where natural gas wells account for more than half the rig count. Spot gas prices have slumped to $1.50/Mcf and less and may come under further pressure soon. Resid demand, earlier running nearly 10% less than year-ago levels with prices to match, now shows signs of life-probably a reflection of fuel switching. Gas producers will have to hold tight to their visions of better days ahead. Those visions have valid footing in the country's environmental concerns. But they depend on the market's confidence in future supply, which will suffer if price jitters throttle drilling.

THE ABANDONMENT THREAT

Another special U.S. upstream squeeze concerns stripper wells, which represent nearly 75% of the nation's total wells, 14% of its crude reserves, and 15% of production. The Department of Energy says the stripper well abandonment rate has increased 175% since 1980. The trend not only reduces current production but also forecloses resources otherwise producible in the future via enhanced recovery and infill drilling. If prices remain at $16/bbl, DOE says, two thirds of the resource might be abandoned by 1995. Producer determination can't do much here; well abandonment is nearly always a decision of last resort, a decision more producers will have to make if prices don't rebound soon.

Relief is fuzzily in sight. International Energy Agency projects a third quarter increase in demand for OPEC crude to 22.1 million b/d, about the quota. If the group can control its mavericks and if refiners don't pull on crude stocks, a shaky balance is possible. But both conditions are essential, and neither is certain. The fourth quarter, when demand for OPEC crude might reach 24.4 million b/d with no stock draw, looks better. Major market concerns for producers then will be worldwide economic growth, Northern Hemisphere weather, and how refiners choose to handle all that crude in inventory.