The free fall in oil prices pulled American crude oil below $20 a barrel for the first time on commodity markets yesterday, triggering a selling wave of stocks on Wall Street by investors worried about the impact of lower prices on the energy and banking industries.
But the price for the benchmark grade of American oil stabilized above the $20 mark at the end of a record day of trading. Analysts said that while the plunge in crude oil prices this year may have slowed temporarily, the likelihood is for continued declines.
The Dow Jones Industrial Average fell 14.68 points to 1,514.45 yesterday as the volatility in oil prices spilled over into stock markets. The selling was heaviest in oil and oil-related issues, such as the stocks of major bank holding companies, whose loans to Third World oil producers could be further endangered by the falling prices. "People have become concerned with owning bank stocks and other issues that might be exposed to lower oil prices," said Thomas F. Ryan Jr., of Kidder Peabody & Co.
Peter C. Beutel, an analyst with Rudolf Wolff Futures Inc., said buyers appeared once the price fell below $20 a barrel for West Texas Intermediate crude, a grade traded on the New York Mercantile Exchange that is closely watched as a guide to prices in this country.
"The fact that we settled above it [$20] is significant," said Beutel, whose firm is a commodity broker. The price of a barrel of West Texas Intermediate, for delivery next month, fell from $21.30 Monday to $19.85 yesterday, before moving upward to $20.55 at the end of trading on the mercantile exchange. That is the lowest point since the beginning of oil futures trading on the exchange in March 1983.
"There's no reason why it should stop at $20," Beutel said.
Trading in futures contracts for West Texas oil hit an estimated 42.6 million barrels yesterday, approximately double the customary volume of daily trading last year, as major oil companies, independents, distributors and speculators crowded into the market. The old record was 35.6 million barrels traded on Jan. 31, 1985. The contracts commit traders to buy or sell a fixed quantity of oil at a specified price, for future delivery.
"We're experiencing a relative free fall [in oil prices], whether it's on the spot [cash] or futures markets," said Sanford Margoshes, an analyst with Shearson Lehman Bros. "We're seeing an absence of buyers compared to the sellers. The buyers are taking a wait-and-see attitude, since we're going into relatively uncharted waters. There's almost a curiosity to see how far down they will go.
"I don't think there are any psychological support levels" under the price of oil, said Margoshes. "My own guess is that . . . we may see something like $15 a barrel," before prices head upward.
"I think the market always overreacts somewhat," said John Sawhill, a partner with the consulting firm McKinsey & Co. and a former top federal energy official. "I'd expect oil prices might rebound a little bit, particularly if we get a cold spell. The long term trend is clearly down," said Sawhill.
The fundamental force driving prices down is the continuing oversupply of crude oil on world markets, resulting from Saudia Arabia's decision in the fall to boost its production dramatically.
Until then, the Saudis had borne the brunt of the stagnant growth in world demand for oil, cutting their production far below capacity. Now, the Saudis have warned that they and the rest of the Organization of Petroleum Exporting Countries intend to get their "fair share" of oil shipments and revenue -- a warning that other producers will have to cut their production or suffer a price war. Oil prices have fallen $6 to $8 a barrel since December, when the increased Saudi production began arriving at refineries.
"I don't think anybody has a good idea where the floor will be [under prices]," Sawhill said. "We won't hit it until see some major restraint on the part of the producing nations -- until some of the OPEC nations begin to back down, or until they get into some sort of dialogue" with the non-OPEC producers, particularly Britain, Mexico and Norway, he said.
The White House yesterday, in a statement read by deputy press secretary Larry Speakes said falling prices would have a favorable effect on consumers, although they are "obviously a problem for all oil-exporting countries and can aggravate the problem of debtor countries." The crude oil price decline is particularly worrisome for Mexico, a heavily indebted Third World nation whose economy is dependent upon oil revenue. In the past, declines in oil prices were generally accompanied by falling interest rates, reducing the debt burden, noted James McDermott, vice president and chief analyst at Keefe Bruyette & Woods. Now, he said, the lower oil prices aren't matched by lower rates. That will put more pressure on Mexico's ability to service its debt, he said.
Analysts were divided over when consumers will see sharply lower prices for gasoline and heating oil as a result of the price drop.
Dan Lundberg, publisher of the Lundberg Letter on energy prices, noted that the average overall gasoline price rose last year, even though prices of crude oil -- from which gasoline is refined -- plummeted. The average gasoline price in Lundberg's nationwide survey rose from $1.14-plus a gallon, including taxes, in January 1985 to more than $1.21 in December.
Lundberg said he could not predict how far or how fast gasoline pump prices will decline in the months ahead. He noted that much of the gasoline in storage and inventories at refineries are based on prices that are well above current levels.
Others expect gasoline and heating oil prices to move downward this spring -- as long as crude oil prices don't rebound. "I'd expect a nickel [reduction] at the pump sometime in February," said Beutel.
"I don't think the fall in prices is that much of a sign of a new era of lower energy prices. I think it's a sign of an era of much more volatile oil prices," Beutel said.