EDITORIAL RISING DEMAND BEST CRUDE PRICE REMEDY

The worst has passed for the upstream oil business.

That statement may seem strange following a do-nothing meeting of the Organization of Petroleum Exporting Countries. In fact, the worst had passed before OPEC ministers met at the end of March, which made doing nothing to cut group production eminently reasonable. Of course, OPEC still can exercise its main lever of market influence - undisciplined output. If it does so in the next few weeks, prices will surely keep failing. This is what the market fears most.

OPEC and other producers have reason to stay the course, however. The market responds to factors other than OPEC politics. And those factors have been improving, insofar as the value of crude oil is concerned. Crude prices hit bottom last December in most areas. Product prices tracked crude prices down through most of last year, keeping refining margins narrow. It was hard-core market weakness and resulted from more than OPEC production politics.

PRODUCT WEAKNESS

To be sure, the raw material side of the market had its share of twists and turns last year: Kuwait's insistence on above-quota production for three quarters, a surge in non-OPEC crude flow, and surprisingly high exports from the old Soviet Union, to name the big three. They certainly weakened crude values. But the market's manufacturing dimension might have offset raw-material weakness if it had possessed some strength of its own. Alas, through most of 1993 there was too much product relative to demand.

That has changed. In the U.S., product values began to recover in December. Crack spreads calculated by Oil & Gas journal on the basis of typical U.S. refinery yields began to widen in January and peaked in February before crude values caught up. Product demand so far this year has run nearly 6% ahead of its 1993 level. Timing and extents of recovery differ in other markets, of course, but the same positive shift in market fundamentals is under was elsewhere. Notes the Centre for Global Energy Studies, London, in its latest Monthly Oil Report: "Good refining margins are responsible for the recent strength of the crude oil market."

Much can go wrong between a strengthening in refining margins and durable recovery of crude prices - an OPEC production contest, for example. But signs of demand revival should do wonders for the patience of producers everywhere.

REASSERTING STATUS QUO

What the upstream petroleum business did not need from Geneva was anything resembling cartel behavior. For one thing, it wouldn't have worked. For another, a price jump born of deliberate production cuts would have revved antipetroleum political passions in the industrialized world.

Furthermore, to expect OPEC to shore up crude values is to ignore Iraq, which is a mistake. Iraq's mostly unused ability to produce 3 million b/d affects the market in undeniable, if temporary, ways. It makes crude buyers far less concerned about security of future supply than they normally would be. And it encourages key OPEC members to cling to current market shares, competition for which they know will intensify when Iraqi Oil flows again. Out of sight and out of mind is no way to treat Iraq in assessments of the current oil market.

So there is little reason to regret OPEC's reassertion of the status quo in Geneva. The group could do little else. For everything ailing oil producers, including a menacing overhang of Iraqi production capacity, the best cure is steady growth in demand for oil. The process began months before OPEC met. What the exporters' group decided was to not impede it.