Oil prices soar after Opec increases output

But, almost immediately, crude soared to a record high of over 56 US dollars a barrel in response to the latest petroleum supply report from the US government which showed that domestic supplies of petrol and heating oil fell sharply last week.

The market was unimpressed with Opec’s decision because it is known to be already exceeding its production ceiling by about 700,000 barrels a day. The new higher ceiling does not necessarily mean extra supply.

Opec’s decision to look to winter and raise its quota just ahead of the northern hemisphere springe – when demand normally falls – was unusual.

It reflected concern about Opec’s ability to influence a stubbornly bullish market that has driven prices of benchmark light crude up about 25% this year alone.

Edmund Dakouru, a Nigerian oil official, said “the extra oil will go a long way” toward meeting any concerns about winter supply.

But others at the meeting suggested the decision was symbolic.

“We’re already all over quota,” Algerian Oil Minister Chakib Khelil told reporters.

The decision to boost output will officially raise the group’s ceiling to an all-time high of 27.5 million barrels a day.

But with Iraq – which is exempt from Opec quotas while rebuilding – and quota-busting factored in, Opec is already producing close to 29.5 million barrels.

In an attempt to ease winter crunch worries, Opec’s president, Kuwaiti Oil Minister Sheik Ahmed Fahd Al Ahmed Al Sabah, said that at full capacity – and including Iraq – the oil-producer group could pump some 31 million barrels a day.

That would represent a daily increase of about 1.5 million barrels from present levels.

“Opec has the resources to meet the growing oil requirement ... forecast for the early 21st century, and is committed to ensuring that the market remains well-supplied with crude at all times, at reasonable prices that are compatible with robust growth in the world economy,” he said.

But not all ministers agreed. Ahead of the meeting, Khelil said: “Opec has reached its production limits.”

“If it came to a crunch, it has capacity for 1 million barrels,” he said.

Opec ministers appeared to be resigned to the fact that Wednesday’s decision would not impress the oil market – in contrast to previous years when Opec production rises usually led to a significant fall in price.

“The market is not under my control,” Qatari Oil Minister Abdullah bin Hamad Al Attiyah said in indirect acknowledgment of Opec’s waning authority over prices.

Al Sabah suggested that Opec believed oil was overvalued, describing the prices as “a matter of much concern to Opec, since they are reaching levels that are not sustainable.”

And instead of taming markets, the timing of the increase raised questions about next time. Most forecasts predict even greater world demand in the future.

“The market is very concerned that even the Saudis might be short of spare capacity by the end of the year,” said Frederic Lasserre, head of commodities research at SG Securities in Paris.

Estimates vary but most surveys put Opec’s spare capacity between one million to 1.5 million barrels a day. Most of it is Saudi oil, which needs more refining than the preferred “sweet” crude produced by some other Opec members. Oil production by states outside Opec is stagnating.

With western economies generally expanding, demand soon could outstrip supply. China’s booming economy is already consuming more than a third of the world’s crude supplies. India’s hunger for oil is also on the rise.

At some point – no one has come up with a firm figure – the market would price oil so high that economies would begin to contract and demand would fall. Rampant inflation driven by high oil prices are also a potential concern.

Violence in Iraq and production shortfalls elsewhere due to weather or labor unrest could worsen the scenario.

“If we have any unforeseen disruptions, the world is going to be short of oil,” said Lasserre. “We can easily imagine prices of 70 to 75 dollars this year if we have such disruptions.”