OPEC boosts output target, oil prices rise

Analysts call move purely symbolic, since cartel already exceeding higher quota; oil prices shoot up by $1-plus after announcement

Edith Balazs

Associated Press Writer

OPEC agreed in mid-June to increase its production quota by half a million barrels a day, though the move was deemed inconsequential by analysts and oil prices shot up by more than $1 a barrel.

The Organization of Petroleum Exporting Countries said its output ceiling will rise from 27.5 million barrels to 28 million as of July 1, and that it will consider another 500,000-barrel increase if prices don’t fall.

Analysts called the move purely symbolic, since the cartel already is exceeding the higher quota, and said it didn’t ease market fears of tightening fuel supplies later this year.

OPEC President Sheik Ahmed Fahd Al Ahmed Al Sabah insisted “there is enough supply in the market. We are confident we can reach the fourth quarter with enough supply.”

If the market needs more crude, “Saudi Arabia, the United Arab Emirates and Kuwait can very easily provide the extra half million barrels a day,” he said.

Other OPEC officials said oil prices are high and volatile because of limited refinery capacity around the globe and geopolitical tensions.

Crude prices have been hovering around $55 per barrel, and the group was working to get them back below $50. In the United States, retail gasoline prices average $2.13 a gallon, up about 40 percent in the past two years, and demand is still on the rise.

The U.S. Department of Energy said June 15 that domestic gasoline demand over the past four weeks has averaged almost 9.5 million barrels per day, or 3 percent above year ago levels. The agency also said in its weekly petroleum supply snapshot that U.S. crude inventories fell by 1.8 million barrels to 329 million barrels, an unexpected drop that triggered buying on futures markets.

Light sweet crude for July delivery rose $1.45 to $56.45 a barrel in midday trade on the New York Mercantile Exchange. On the International Petroleum Exchange, July Brent was up 92 cents to $54.65 a barrel.

“Today’s OPEC meeting is a past story, really,” said Peter Gignoux, an analyst with New York-based GDP Associates. “At the end of the day, we have a demand issue, not a supply one.”

Global oil demand is expected by many analysts to average more than 84 million barrels a day in 2005, maintaining pressure on producers, whose spare output capacity is roughly 1.5 million barrels a day.

“It’s unlikely this will have a major effect in the short-term, as we believe OPEC has limited capacity to increase production,” added Daniel Hynes, an energy analyst with Australia’s ANZ Bank.

Al Sabah said the group had little choice but to do something with prices already high and expected to climb, although he conceded that he didn’t expect raising the quota to have an immediate effect.

The cartel also agreed on a new, larger oil basket — the combination of crude oils that OPEC uses as its price gauge — that would increase from seven types of crude to 11.

Problem lies with refineries

Including Iraq, which is not bound by the quota, OPEC is churning out close to 30 million barrels a day, or about 35 percent of current global demand.

The group needs to increase supply at the end of July or early August to meet demand in the fourth quarter. He said OPEC would increase fourth-quarter output to between 30.5 million barrels a day and 31 million barrels a day.

With markets sufficiently supplied, the lack of spare refining capacity was a key factor driving soaring prices, OPEC said.

“We have to trace the root of the problem, and that is whether refineries can accommodate” further increases in oil production by processing lower-quality crude, Al Sabah said. “The main problem now is the refineries.”

Kamel al Harami, an oil analyst from Kuwait, contended that OPEC is helpless to cool prices. “The situation is out of its hands,” he said, predicting prices will remain at their current level.