Updated from 1:13 p.m. EST
Crude oil prices dropped to two-month lows on Wednesday following an agreement by the
Organization of Petroleum Exporting Countries
to increase its output, but analysts said they did not expect the market to remain bearish.
"I think the market is making a premature judgment in selling this market down to this level," said Tim Evans, senior energy analyst at
Pegasus Econometric Group
. "The change in inventory that is likely to result from this move is relatively small."
Crude oil for May delivery sank 70 cents, or 2.6%, to $26.40 a barrel in late afternoon trading Wednesday, as the market digested news of OPEC's agreement to raise production 1.45 million barrels a day beginning in April.
President Bill Clinton
praised OPEC's decision to increase oil outputs and urged oil companies to lower their prices.
"These increases should bring lower prices, which will help to sustain economic growth here in America, and also, and very importantly, throughout the world," Clinton said at a news conference in Washington.
Although the increase was less than the expected 1.7 million barrels a day because of Iran's defiant decision not to join the agreement, the market slipped as traders anticipated that discord among OPEC members would cause some members to break their quotas. Iran, angered by the U.S.' efforts to get OPEC to increase production by up to 2.5 million barrels a day, later said that it would raise its output in order not to lose market share. This move indicates that it would pump an additional 264,000 barrels a day.
But analysts said that any sign of internal strife tends to contribute to traders' bearishness. And the fact that OPEC and non-OPEC nations Norway and Mexico would together raise production by only about 2 million barrels a day, also gave analysts reason to expect an upturn in crude prices.
"Basically, all they did was roll back the cuts they put in place last year," said Tom Bentz, an analyst and trader at
Bentz said that with oil prices more than $7 a barrel off of recent highs, the market would now stabilize in the $26 to $27 a barrel range and might even try to break the resistance on the upside.
Gasoline, meanwhile, also skidded, dropping 3.18 cents in the May futures contract to 85.30, bouncing back from a low of 84.20 cents a gallon. Gasoline prices are expected to climb higher due to low inventories as the U.S. heads into summer driving season as it will take about six weeks for crude oil to reach America's shores and additional time to get to the pumps.
OPEC is scheduled to meet again on June 21 to discuss the impact of the increases on world oil prices.