While the major military powers have convened in the Persian Gulf to assure the flow of oil from the Middle East, the oil world itself seems to have forgotten the tension. Oil prices continued a steep decline yesterday as fresh signs of a glut again gripped the market.
By the close of trading yesterday, some prices for crude oil had dropped below the levels that prevailed before the last OPEC meeting in June. But traders and analysts were speculating that the bottom may have been reached.
The prolonged decline, to the $18-a-barrel range from a peak of $22.75 as recently as mid-July, could knock a few cents a gallon from the price of gasoline, analysts say. The fall could also weaken the hand of the Organization of Petroleum Exporting Countries as winter nears and OPEC tries to boost its official prices.
But few economists expect another price collapse like the one that drove down inflation and rocked the oil industry last year. There was some evidence that Saudi Arabia, believing that prices were too high last month, was moving to regain control.
OPEC leaders have begun to discuss some sort of intervention to bring over-producing cartel members into line so that prices don't fall too far. Some OPEC watchers said that the mere discussion of such a step would prompt some members to turn down their spigots.
"Only the good Lord knows, but my guess is we may have even tested the lows today," said Sanford C. Margoshes, international oil analyst at the investment firm of Shearson Lehman Bros. in New York. "I don't think it's going to get out of control."
Prices plunged as much as 75 cents a barrel for the key U.S. crude oil, West Texas intermediate, before recovering to end the day off 30 cents at $18.60 a barrel -- a four-month low -- on the New York Mercantile Exchange. The prices are those paid for oil to be delivered in October.
In Britain's futures market, prices for a key type of crude pumped from the North Sea tumbled by $1.05 a barrel to $17.20.
Analysts said both markets were reacting to news from a Cyprus-based newsletter, the Middle East Economic Survey, which said OPEC members are producing 19.7 million barrels a day this month -- or about 3 million barrels more than their quotas allow.
The quota of 16.6 million barrels a day and official average prices of $18 a barrel for various grades of OPEC crude oil are part of the system put in place by the cartel over the last six months to gradually bring prices back up after the disastrous collapse of 1986.
The price-fixing accord succeeded in raising prices from $10 a barrel a year ago to the $18-to-$20 range by early this summer. But, at about the same time, military tension accelerated in the Persian Gulf and some OPEC members began to produce above their individual quotas.
Transfixed by the dangers posed by U.S. naval vessels escorting Kuwaiti oil tankers past Iranian missiles and mines, oil traders ignored the overproduction and drove crude prices up in anticipation of an interruption of supplies through attacks on tankers.
"Now we're focusing on the overproduction and on the fact that the U.S. is basically ensuring the safe flow of oil through the gulf," said John Hill, a trader for Merrill Lynch Futures in New York.
Yesterday's report by the Cyprus newsletter was only the latest of many signs that OPEC is producing too much oil, but it was regarded as the most authoritative because the newsletter is considered to have close ties to OPEC's biggest producers, the Saudis. It was also considered a sign that Saudi Arabia is stepping up its efforts to police the cartel.
Disclosures that the Saudis themselves are among those producing above their quotas support the theory that Saudi Arabia is firing a warning shot across the bow of its OPEC colleagues. Its enormous oil reserves and unused production capacity give Saudi Arabia the power to flood the market and drive prices down, as it did in 1986, an event it could withstand much more easily than other members of the cartel.
The Saudis are price moderates within OPEC who believe that rapid runups in oil prices damage their cause over the long term.