Oil price riot may be out of OPEC’s hands

The Associated Press

Members of the Organization of Petroleum Exporting Countries might have lost control of a surge in oil prices that ministers claim is being driven by forces out of the cartel’s hands.

Ministers from OPEC meet in a few days in an effort to stem an upward price spiral, when most were bracing for a seasonal slump on world crude markets.

OPEC has long fretted openly that a drop in global fuel demand after the northern hemisphere winter and a recovery in Iraq to pre-war crude export volumes would bring oil’s five-year price bonanza to a screeching halt.

Instead, in mid-March U.S. crude hit a 13-year high in New York of more than $38 a barrel, raising the alarm on energy costs for importing nations.

OPEC’s decision to slice production quotas by 4 percent from April 1 now looks to be one step too far in its campaign of supply restrictions that is designed to keep prices in a $22 to $28 range.

Ministers must decide whether to defer or cancel the April cut, and risk a big fall in prices, or go ahead with it and upset consuming nations.

“By not cutting, it runs the risk that prices fall precipitously if stocks continue to build and [petrol] is unsupportive,” said William Buchanan of Standard Bank in London. “Cutting as planned could encourage more funds to push prices even higher.”

OPEC blames external forces, rather than any shortage of its crude, for lifting benchmark U.S. crude futures to an average of more than $35 a barrel this year, well above last year’s $31 average, itself the highest in two decades.

China’s rampant fuel demand growth, geopolitical security fears and low U.S. stocks of a new green fuel have turned oil futures into a buying magnet for big-money fund managers.

The speculative buying has fueled OPEC’s fear that a sudden exodus could send prices into freefall. The big question now is whether OPEC, and Saudi Arabia in particular, think prices are too high for the cartel’s own good.

Self-interest indicates OPEC best avoid allowing high prices choking off fuel demand but so far U.S. and Chinese demand growth suggests consumers are getting used to more expensive fuel.

Many expect the cartel to make no change to quotas and to manage prices by leaking supply.