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OPEC boosting output ceiling by 2 million barrels in July Decision no guarantee of more oil on market, since cartel already producing 2.3 million barrels above limit; increase will come over two months Bruce Stanley Associated Press Business Writer
OPEC’s decision to raise its output ceiling by up to 11 percent over two months may help soothe a nervous market, but it doesn’t oblige the group to pump a single barrel of additional oil.
The Organization of Petroleum Exporting Countries agreed June 3 to hike its production ceiling by 2 million barrels a day next month and an additional 500,000 barrels a day in August, if necessary, in a bid to rein in uncomfortably high prices for crude.
OPEC portrayed the two-stage increase as a strong signal of its resolve to ensure ample supplies for a growing world economy. Representatives of the group approved the decision during four hours of talks at a Beirut hotel. Production already above current ceiling However, OPEC acknowledges that it’s already producing at least 2.3 million barrels above its current ceiling of 23.5 million barrels. Even if OPEC followed through with both stages of its planned hike in the target, OPEC President Purnomo Yusgiantoro implied that it would simply be legitimizing the current overproduction. Still, crude prices cooled after OPEC’s announcement, easing 9.5 percent since hitting record highs earlier in the week. But industry analysts said the decision was unlikely to make gasoline any cheaper in the United States, where refinery constraints and rising demand during the peak summer driving season have pushed prices higher at the pump.
“Gasoline prices are still going to stay high,” said Jamal Qureshi, of the Washington-based consultancy PFC Energy. Saudis wanted increase at once In his opening address at the meeting, Purnomo of Indonesia called on OPEC’s members to do “as much as they can to help stabilize the oil market,” but he refrained from an explicit request for them to provide additional barrels above what they’re already producing.
Saudi Arabia, OPEC’s most influential member, pushed to lift the ceiling by 2.5 million barrels all at once, and markets were expecting OPEC to approve the widely publicized Saudi plan. But OPEC member Iran insisted on a more gradual rise, to keep prices from falling too fast, and the Saudis compromised on the conditional two-step increase.
Claude Mandil, head of the Paris-based International Energy Agency, said OPEC’s decision shows that producing countries recognize that production is important for calming oil markets. The IEA is the energy watchdog for oil importing nations.
“At the same time, we think the most important (thing) is not quotas, it’s not targets,” he said. “What is really important is real extra barrels.” Actual increase in supplies needed Many analysts agreed, arguing that OPEC’s focus on its production ceiling was diverting attention away from the market’s need for an increase in actual crude supplies.
“Who cares about the quotas,” said Adam Sieminski of Deutsche Bank in London. “The important thing is what the Saudis are doing with their volumes and what others are doing with production as well.”
Under pressure from the United States and other major importers, Saudi Arabia has already boosted its actual output by 600,000 barrels a day, independently of OPEC. Saudi Arabia has the world’s largest proven oil reserves and is the only OPEC member with capacity to pump significant amounts of fresh oil. The United Arab Emirates announced June 2 that it would raise production by more than 400,000 barrels a day, while Kuwait said it would increase output by 100,000 barrels. Prices have escalated Prices have escalated in recent weeks despite OPEC’s efforts to meet market requirements, the group said in a communique. Geopolitical tensions, stronger than expected demand in China and the United States, and stricter U.S. specifications for gasoline have all contributed to higher prices, it said.
“Combined, these factors have led to unwarranted fear of a possible future shortage of crude oil, which has, in turn, resulted in increased speculation in the futures markets with substantial upward pressure on crude oil prices,” OPEC said.
Contracts of light U.S. crude for July delivery shot up to $42.33 a barrel on June 1 — the highest settlement price in the contract’s 21-year history on the New York Mercantile Exchange — following a terrorist attack in the Saudi oil hub of Khobar that killed 22 people, most of them foreign oil workers. The attack stunned markets, which were already jittery about stretched oil inventories and instability in the Middle East.
But prices fell about 6 percent on June 2, after Saudi Arabia claimed backing for its proposed hike in production limits, and they slipped again June 3 and early June 4. Contracts of U.S. light crude for July delivery were 63 cents lower at $38.65 a barrel in early June 4 trading on the New York Mercantile Exchange. In London, July contracts of Brent crude fell 33 cents to $36.07 on the International Petroleum Exchange.
Analysts predicted that the increase in OPEC’s ceiling would have only a modest effect on crude prices in coming weeks.
Yasser Elguindi of Medley Global Advisors in New York said U.S. prices would stay “very strong” during the summer, averaging $35 a barrel. Disruptions in supplies — such as a strike in Nigeria, political chaos in Venezuela or another terror attack in the Gulf — could push prices still higher, he said.
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