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Oil Prices Keep Dropping, With Little Relief in Sight

The outlook for crude oil prices took a decidedly negative turn on the news of a deal between the United Nations and

Saddam Hussein


The agreement, signed Monday, lifts the Iraqi ban on weapons inspections in eight presidential compounds, eliminating the main point of contention in prior attempts to end the four-and-a-half-month standoff. The agreement was hailed throughout the world, yet U.S. officials remain somewhat skeptical and will have a chance to veto the agreement brokered by U.N. Secretary General

Kofi Annan

when it is presented to the U.N. Security Council on Tuesday.

The U.N. also announced Friday after the market closed the approval of the latest round of Iraq's oil-for-food deal. Under the new terms, Iraq can export up to $5.2 billion of oil during a six-month period to buy food and medical supplies. Iraq can begin selling oil as soon as its distribution plans are approved, which could be as early as next week.

With little news in the market to relieve price pressure, the slide in oil prices will likely continue. Moreover, the selloff of the equities that trade on the commodity's price may worsen before buyers come back in full force. Futures for April delivery of the West Texas intermediate crude were down 46 cents to $15.78 per barrel at midday Monday, on the heels of a steep drop in Brent North Sea crude, the international benchmark. The

Oil Service Index

was pushed down 3.86, to 95.71, a level last seen in late January.

Barring what traders and analysts call "a total disruption in supply" or the reining in of


overproduction, they see the futures market heading lower. "The market probably won't bottom until it thinks it's going to $10 per barrel," says Tom Bentz, an analyst at

TheStreet Recommends

Cresvale International

in New York. He added that even if crude dips to $14, it probably won't stay there too long. Still, he believes that the market psychology is such that prices will have to get to the point where there is a feeling of no hope, and that those prices are going down the drain before they turn around. "We could be seeing weaker prices well into the second quarter," he says.

Peter Bisani, at

Prime Charter

in New York, concurs. "I don't see a major recovery in oil," he says. It would take an event really "substantial" for prices to firm up, he added. One such event could be a full ministerial meeting of OPEC oil ministers to discuss the downturn in oil prices.

Any bullish signals will come from the OPEC ministers themselves, says Edward Kevelson, a vice president at

Paribas Futures

. An OPEC meeting would generally be better for the market if they "would force themselves to take a hard look" at prices and quota-beating, he says.

Although Annan's Iraqi deal is "very good for the rest of the world," the crude price drop is definitely "not good news for the oil market," says Cresvale's Bentz. "It's only a matter of time before we see crude heading under $15.50 and maybe heading under $15

per barrel," he says. Although the U.S. economy remains strong and demand for energy sources is still growing, expectations of the rate of growth have definitely tapered off. When lowered demand is combined with the additional supply coming online from Iraq as well as from Venezuela and Nigeria, two OPEC nations regarded as overproducers, pricing pressure grips the market.

Energy service stocks have borne the brunt of the pressure on crude prices for more than two months. The theory behind the selloffs is that "if energy prices are weak, then the demand for services will be weak," says John Cabell, co-manager of the $700 million

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USAA Mutual Aggressive Growth fund. Cabell, who has been holding positions in energy service stocks with exposure to the deepwater drilling markets, has sold "a little bit ... just selectively," he says, and is buying companies such as airlines that lower their own costs by paying lower prices for fuel.

"Internally I try to hedge my bets a little by buying companies that will benefit by the downturn in energy costs," he says.