Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: FRIDAY, March 25, 1994                   TAG: 9403250234
SECTION: BUSINESS                    PAGE: B-7   EDITION: METRO 
SOURCE: Houston Chronicle
DATELINE: GENEVA                                LENGTH: Medium

OPEC WARNED OF PRICE DROP IF IT DOESN'T CUT PRODUCTION

Staffers from the Organization of Petroleum Exporting Countries Secretariat warned in a report distributed to ministers gathering in Geneva for Thursday's spring meeting that a decision to retain their current production levels could push prices for OPEC oil down into the single digits. The warning was first reported by Knight-Ridder Financial News and later confirmed by an OPEC delegate.

In recent days, OPEC oil has been fetching an average price of about $13.50 a barrel. OPEC oil generally sells for about $2 per barrel less than the U.S. benchmark crude, West Texas Intermediate.

U.S. prices on the New York Mercantile Exchange closed Thursday at $15.08 per barrel, up 18 cents. If OPEC continues its current quota of 24.52 million barrels a day and the staffers' prediction rings true, U.S. prices could drop to $12 or less.

If OPEC cuts its current production 1 million barrels, prices would improve, but not until the fourth quarter of the year, the staffers said.

But if OPEC were willing to take more dramatic action and cut its production to 23.1 million barrels a day during the second and third quarters, oil prices would return to the levels seen two years ago of more than $18 for OPEC crude, the staffers said.

OPEC ministers have frequently ignored staffer reports in the past.

Most observers have predicted that OPEC, rather than cut output, would opt to roll over its current production limit into the second quarter and possibly into the third and fourth quarters.

The problem with a rollover is that demand for oil is usually weakest during the second quarter. OPEC officials have already predicted that demand for the quarter starting April 1 will be about 23.23 million barrels a day, far below the group's current actual production of about 24.9 million barrels a day.

On Thursday, an Iranian delegate arriving in Geneva said his country would object to a rollover. He would not say, however, how quotas should be changed.

``It depends on the situation of the markets,'' he said.

A production cut would be easier for Iran to swallow than some other OPEC members, since Iran is producing less than its quota.

The wild card is Saudi Arabia, OPEC's largest producer, which is allowed to pump a massive 8 million barrels a day. Most OPEC watchers have presumed Saudi Arabia would not agree to go below its current production level, fearing that a cut might not translate into higher prices.

Yet one OPEC source, who asked not to be identified, noted that ``Saudi Arabia would like to see prices improve.''

Vahan Zanoyan of the Washington-based Petroleum Finance Co. said he thought the staffers' estimates were exaggerated.

``I don't think it will go to single digits,'' Zanoyan said. ``I don't think that price decline would be sustainable.''