Market watch, July 17

Oil prices appear on the edge of a plunge�perhaps as low as $20/bbl�after members of the Organization of Petroleum Exporting Countries were alerted Monday to prepare for another production increase of 500,000 b/d this month.

Oil prices plunged more than $1/bbl Monday in overnight trading on the Singapore market after members of the Organization of Petroleum Exporting Countries were alerted to prepare for another production increase of 500,000 b/d.

Ali Rodriguez Araque, Venezuela's energy minister and current conference president for OPEC, notified his peers that they should be prepared to raise production if market prices remain at current levels. "Other things being equal, it is expected that this will happen before the end of the current month," he said.

That likely will trigger a scramble for markets that could cause a tumble of oil prices back to $20/bbl, said Fred Leuffer, senior managing partner and oil analyst at Bear, Sterns & Co.

The proposed increase would boost OPEC's total production to 25.9 million b/d from the 25.4 million b/d that cartel members agreed to in June when they raised production by 708,000 b/d.

That news reached the Singapore market late in its trading session, triggering a drop of $1.03 to $29.23/bbl in the September contract for North Sea Brent. The October contract dipped 39� to $28.78/bbl.

Traders in the Asian market said an extra 500,000 b/d of production would certainly dampen recently high prices. But the immediate impact will be best measured by today's trade on the International Petroleum Exchange in London and the New York Mercantile Exchange.

Reports that Saudi Arabia was increasing its production for export to Asia triggered a 7� dip in the August contract for the benchmark NYMEX blend of light, sweet crudes to $31.40/bbl on Friday. But the September contract inched up 2� to $30.43/bbl in the only significant hydrocarbon gain for that day.

In after-hours electronic trading Friday, both contracts retreated to $31.07/bbl and $30.10/bbl respectively.

The August contract for heating oil dropped 0.71� to 80.9�/gal on the NYMEX, while unleaded gasoline for the same month fell 0.94� to 96.3�/gal.

The August contract for natural gas lost 1.6� to $4.15/Mcf.

In London, North Sea Brent fell 38� to $29.88/bbl Friday on the International Petroleum Exchange as the August contract expired. The August natural gas contract dipped 1� to the equivalent of $2.77/Mcf.

Saudi officials had earlier indicated that they were planning a unilateral increase of 500,000 b/d in an attempt to drive down high prices. Under the quotas proposed by Araque, the Saudis would bear the brunt by adding 162,000 b/d of production to a total 8.4 million b/d.

"The flood gates are now open. Saudi Arabia's decision to produce more oil means OPEC unity is out the window. The race is on to see which countries can capitalize on these high oil prices while they last," said Leuffer in a report issued Monday.

He said every OPEC member except Nigeria has cheated on its new production quota in the last two months.

Saudi officials would like to push back world oil prices to a level of $25/bbl to prevent the US from increasing domestic oil exploration and development of alternative energy sources.

But it is difficult to engineer a market price reduction, as other nations try to cash in before oil prices drop, Leuffer warned. "Once oil prices start to fall, it will be hard to stop them," he said.

Last week, traders were still waiting for a clear indication whether OPEC would again boost production ahead of the next scheduled ministers' meeting in Caracas, Venezuela, at the end of September.

But following a Sunday meeting with Abdalla Salem El-Badri, Libyan secretary of the national oil corporation, Araque again blamed speculators for the run-up in international oil prices.

A separate meeting between Araque and Iranian petroleum minister Bijan Namdar Zangeneh over the weekend produced a joint denial that OPEC can solve all market problems. They said demand is growing for light petroleum products, while additional crude supplies from OPEC members "will continue to be on the side of heavy and sour. This has resulted in the widening of the differential between sweet and sour crude, a problem that can not be solved by OPEC."

In a separate statement, Iranian President Mohammad Khatami called for solidarity among OPEC members to keep production and prices at "justifiable" levels.

In a not-too-veiled reference to lobbying by US officials, Khatami said OPEC members should be wary of "political" influences from outsiders. "I believe there are hands at work to prepare the ground for tilting the balance between supply and demand, hence inflicting irreparable damage on oil producers through sudden falls in price," he said.

The average price for the OPEC basket of seven crudes dropped 66� to $28.83/bbl on Friday. That basket price averaged $28.83/bbl for the week, down from an average $29.49/bbl during the first week of July.

So far this year, the OPEC basket has averaged $26.45/bbl, including an average $29.12/bbl in June. That compares with the 1999 average of $17.47/bbl.

More in Exploration & Development