Interesting read..........
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OPEC's tepid message: quota will match existing output
Neela Banerjee NYT Friday, June 4, 2004
BEIRUT The Organization of Petroleum Exporting Countries agreed Thursday to raise its oil production quota by two million barrels a day, or 8.5 percent, in what industry analysts here said was a tepid message to oil markets about the group's commitment to dampen oil prices, which have hovered around $40 a barrel for the last month.
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The problem, analysts said, is that OPEC is already overproducing from its March quota of 23.5 million barrels a day by at least two million barrels. OPEC's decision essentially legitimizes that overproduction without adding to the market.
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"They're not doing anything," said Roger Diwan, managing director of PFC Energy, a Washington consulting concern. "There's no sense of urgency. It's a bullish signal to the market. If you were expecting a change of policy in Beirut, come again."
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The decision to lift the quota goes into effect July 1, and the organization's 10 voting members said they would add another 500,000 barrels to the quota by Aug. 1. Nonetheless, the group plans to meet in Vienna once more on July 21 to review market conditions.
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The thinking within OPEC may have been best summed up by the Algerian oil minister, Chekib Khelil. There is plenty of crude oil in the world, Khelil said in an interview, but OPEC needed to send a message to the market that it, too, is concerned about high prices.
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"Consumers have been asking for it," he said of the quota increase. "What do you think would have happened if we had not done this?"
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Oil prices rose to almost $41 a barrel on news of the OPEC decision, but they later fell after the U.S. Energy Department reported healthy increases in stockpiles of crude oil, gasoline and distillate fuels. In late trading Thursday, crude oil was down $1.36, to $38.60, on the New York Mercantile Exchange.
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The growth in U.S. stockpiles may be the first sign of increased output from Saudi Arabia, which has nearly all the world's spare capacity. Nearly all other oil-producing countries are pumping flat-out. But the Saudis said about 10 days ago that they would increase production to help bring prices lower and that the quota should go up at this meeting by 2.5 million barrels a day.
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To the Saudis and some other OPEC members, a sustained $40 a barrel poses the threat of reduced demand.
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The Saudis could increase daily production to 9.1 million barrels a day this month, as against 8.3 million barrels in April, estimated Vera de Ladoucette, senior director for Middle East research at Cambridge Energy Research Associates, a consulting group. About 1.5 million barrels of that would go to domestic use, and the rest to exports.
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But the market may have been looking for a stronger stand from OPEC on pushing prices lower, analysts here said.
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"The market is looking for solidarity," said Falah Aljibury, an independent oil analyst. "It's a compromise that's not fully behind the Saudi proposal. The Saudis are concerned about high prices, others are concerned, but I'm not sure if some other members understand the gravity of the situation."
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Aljibury and others pointed out that Iran may have dug in its heels about fully endorsing the Saudi position to increase the quota to 2.5 million barrels a day immediately. Iran, historically an advocate of high prices, has no spare capacity, so it stands to gain nothing from an increase in output, analysts said.
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OPEC is also wary of advocating all-out production because so little of the recent price increase has to do with supply. Fear of political turmoil in Iraq, Nigeria and Venezuela and terrorist attacks in Saudi Arabia, as happened last weekend in Khobar, an oil hub, have added $6 to $8 to the price of a barrel.
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OPEC members worry that if they produce even more now, it might lead to a glut of oil once those worries subside, leading to a sharp decline in prices, analysts said.
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Only over the coming weeks will it become apparent if the OPEC decision on Thursday matters at all to oil prices, given Saudi Arabia's unilateral decision to produce more. But the decision in Beirut does indicate that all OPEC members, including Saudi Arabia, are much more comfortable with higher prices than their consumers are.
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"No one ever got fired for making too much money," an oil trader said. "Their budgets are doing great. You see it everywhere in these countries, with all the new building going on."
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