Oil prices retreat as OPEC raises production
Oil prices retreated from close to record highs today after OPEC agreed to raise production by 500,000 barrels a day.
At a meeting in Iran, OPEC appeared to bow to pressure from Saudi Arabia by agreeing to raise output when most analysts expected current quotas to be maintained.
The news gave a boost to oil-dependent shares such as British Airways, which advanced on a day when most other blue-chip stocks lost ground, including oil majors Shell and BP.
The trigger for the surge in energy costs in past weeks has been the cold snap which has gripped major economies in the northern hemisphere and eaten into oil and gas stocks.
The price of a barrel of benchmark Brent went above $53.5 a barrel earlier this month – its highest level since trading began in 1988 – while US light crude has hovered just below its all-time high of $55.67 a barrel.
The cost of US light crude fell 1% to $54.60 today on hopes that the output hike by OPEC will enable western nations to rebuild their inventories. Brent also fell 45 US cents to $53.40 on London’s International Petroleum Exchange.
Saudi Arabia – the world’s biggest oil producer – led calls for higher production amid growing fears that the global economy may be hampered if oil prices stay high.
Its stance won support from Kuwait and Saudi Arabia even said on Tuesday that it may boost supplies unilaterally to bring relief to world markets if other Opec members balked at its proposal to raise the cartel’s output quota.
OPEC agreed today to lift output by 500,000 barrels a day and held out the possibility of another hike of 500,000 barrels a day if needed.
Libyan oil minister Fathi bin Shatwan confirmed the decision which will officially raise OPEC’s ceiling to 27.5 million barrels a day, tying an output record.
Analysts remained cautious about whether this will be enough to cool prices significantly, pointing out the China was continuing to guzzle oil to fuel its economic boom and India’s energy demands were growing.
Although consumption over the spring months is traditionally at its lowest, the common fear is that OPEC will be overstretched when demand picks up again in winter.
Barclays analysts said: “The dilemma that OPEC continues to face is that in raising its own production levels it reduces an already low level of spare capacity, thus heightening the sensitivity of the market to any production problems or sudden surges in demand.”
Estimates vary but most surveys put OPEC's spare capacity at between 1 million to 1.5 million a day.
