Oil prices rebounded yesterday in a rally that traders and analysts said was triggered by technical factors and market fears that the steep and steady decline in oil prices over the past couple of weeks had pushed prices lower than justified by petroleum supply and demand.
The price of benchmark West Texas intermediate crude oil for October delivery rose 82 cents to $19.46 a barrel on the New York Mercantile Exchange after dropping as low as $18.60 -- a four-month low -- earlier this week.
"We have seen the end of this little downturn," said William Randol, an oil analyst at First Boston Corp.
"Overall, it's a very pleasant surprise," Sanford Margoshes, an international oil analyst at Shearson Lehman Bros. Inc., said of the price increase.
Experts said there was a wave of buying on the futures markets by traders holding short positions in oil. Short sellers are speculators counting on prices to fall who sell oil they don't have, hoping to buy it at a cheaper price before it must be delivered. Rising prices force short sellers to buy quickly contracts to cover their positions.
In addition, traders said, the market reacted to concern that the recent decline may have been too sharp. "It seems that the market has been very oversold lately, and what we're seeing here is a bit of a reassessment, people saying to themselves, 'Maybe it has come down a little rapidly,' " said Peter Beutel, an oil trader for Elders Futures Inc. in New York. "I'm not sure that anything has changed that dramatically other than that people have gotten a little bit ahead of themselves."
"I would think it's partially a technical reaction, because the slide was pretty sharp, from $22 to $18," Randol said. "Literally in two or three weeks you saw a $4 drop in the price of crude. It's not surprising to me that you could see a rally in the last day or two."
Beutel said the rebound had been accelerated by computerized buying programs employed by many futures traders that are triggered by sudden price run-ups, much like programmed stock market trading.
Oil prices have been in a steady decline for the past two weeks after peaking at $22.76 a barrel amid concern about Iran's threats to disrupt oil shipments in the Persian Gulf. The decline has been fed by perception that the Organization of Petroleum Exporting Countries is producing 3 million barrels of oil a day more than its stated quota of 16.6 million barrels a day.
The decline was checked Tuesday, coincidentally with a flurry of news from OPEC indicating that the oil cartel was taking steps to bring its production levels under control before an oil glut further eroded prices. OPEC President Rilwanu Lukman said a small group of oil ministers would begin visiting other member countries believed to be producing above quota levels, and he announced that OPEC's pricing committee would meet Sept. 7 to take up the problem.
Lukman also claimed that OPEC's production was no higher than 17.2 million barrels a day, a statement discounted by most Western observers, who believe the cartel is pumping as much as 20 million barrels daily.
Just which OPEC members are overproducing is a matter of some dispute, with Iraq, Abu Dhabi and Kuwait often mentioned as the villains. But some analysts also believe Iran -- one of the most ardent critics of overproduction -- has been producing more than its quota, and some believe OPEC's largest member, Saudi Arabia, also is over its limit.
Margoshes said yesterday's price increase was due in part to "a recognition that Saudi Arabia is one of the culprits in that they overproduced to bring prices down, and now that prices are down, they will have to reduce production."