OPEC ups oil output in bid to hold prices
OPEC hopes to put a lid on stubbornly-high crude prices by adding 500,000 barrels a day to its targeted output, but vigorous worldwide demand and a dearth of spare production capacity could combine to thwart its plans.
With most of the group’s members already pumping flat out, some analysts worry there is little slack in the global supply system, and they say a disruption in crude shipments from a major producer could trigger a damaging spike in prices.
OPEC agreed yesterday to raise its daily production target by 2%, or 500,000 barrels, in an effort to keep prices from rising beyond already uncomfortable levels of around 40 dollars a barrel. The augmented target will take effect on August 1.
OPEC made the increase automatic, by mutual agreement, and cancelled a formal meeting it had planned for its members on July 21 at its headquarters in Vienna, Austria, said Purnomo Yusgiantoro, the group’s president.
OPEC supplied almost two-fifths of the 81.9 million barrels of oil that the world consumed on average each day from April to June, according to the International Energy Agency, a watchdog agency.
Although oil-exporting countries are eager to maximise profits, OPEC and its de facto leader Saudi Arabia worry that global economic growth and the long-term demand for crude could suffer if prices soar higher.
However, few analysts expect the increase in OPEC’s target to do much to reduce prices from current levels. They say oil markets had already factored the increase into prices, and most of the group’s members are already producing all they can to satisfy strong demand in Asia and North America.
Indeed, some observers estimate that the world has little more than 1 million barrels in spare capacity remaining – a paper-thin cushion with which to offset a sudden halt in shipments from Iraq or any other important producer.
“I think these are dangerous times. The danger is that a supply disruption at this stage would create unprecedented problems and unprecedented prices,” said Peter Gignoux, a London-based oil adviser for GDP Associates in New York. Gignoux refused to estimate how much higher prices might go.
Contracts of US light crude for August delivery fetched 40.65 dollars a barrel, down 32 cents, in afternoon trading on the New York Mercantile Exchange.
OPEC agreed last month to make a two-step increase in its output ceiling, to try to calm concerns about disruptions in supplies from Iraq and a possible terror attack on export facilities in Saudi Arabia.
The group decided first to raise its ceiling by 2 million barrels on July 1, and agreed to follow up with a second increase of 500,000 barrels on August 1 if market conditions warranted.
Fresh concerns about supplies have contributed to strong prices since then. Chronic strife in Venezuela and Nigeria, legal problems for Russia’s biggest oil company Yukos, and recurring sabotage on export pipelines in Iraq have all added to fears of a possible shortage.
“The only stabiliser we’ve got left is Saudi Arabia. They’re doing 100% of the work right now in keeping the oil market as stable as is possible,” said Paul Horsnell of Barclays Capital in London.
Saudi Arabia, which now pumps around 9.1 million barrels a day, is the only producer with significant flexibility to pump more.
After consultations on Wednesday, OPEC determined that ”market conditions remain essentially unchanged” from last month. The group agreed, therefore, to proceed with the August 1 target increase “in order to maintain adequate supply to the market and support the continued, robust, global economic growth,” Purnomo said in a statement.
OPEC members took the exceptional step of cancelling next week’s meeting, agreeing there was no longer a need for it. Purnomo, who is also Indonesia’s energy minister, stressed that they still would closely monitor market conditions.
OPEC’s official production ceiling is now 25.5 million barrels a day, rising next month to 26 million barrels.
But OPEC’s true production far exceeds its new notional target. The Paris-based International Energy Agency estimates that OPEC produced an average of 26.9 million barrels a day in June – or 3.4 million barrels above its target at the time.
“It’s almost academic. They’re already producing way over quota,” said John Waterlow of Wood Mackenzie Consultants in Edinburgh, Scotland.
Also, markets had anticipated a 2% boost in the ceiling ever since OPEC approved it in principle on June 3 in Beirut, Lebanon.
“The increase itself has been telegraphed in the same fashion that dropping a brick on someone’s toe gives a hint,” said Jan Stuart of New York brokerage FIMAT USA.
”Whatever impact this is going to have has been already digested in the market for a month and a half.”
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