OPEC agrees to raise oil output ceiling
Friday, June 4, 2004
BEIRUT, Lebanon -- OPEC agreed Thursday to raise its oil production ceiling by 2 million barrels a day next month and an additional 500,000 barrels a day in August if necessary in a bid to rein in high prices. Oil prices fell for the second straight day from peaks reached earlier this week. But industry analysts said the hike was unlikely to lead to cheaper gasoline in the United States due to refinery constraints and other production bottlenecks, and would have only a modest impact on crude prices.
Saudi Arabia, the group's most influential member, had proposed an increase of 2.5 million barrels, or 11 percent, to be made all at once.
The Organization of Petroleum Exporting Countries agreed on an unusual two-stage increase, however, as a compromise because some producers, such as Iran, preferred a more gradual rise. OPEC representatives approved the decision during four hours of talks at a Beirut hotel.
"We have decided to lift the ceiling to 25.5 (million barrels a day) effective July 1 and 26 (million barrels a day) effective Aug. 1, and we will meet to review future action on July 21 in Vienna," Saudi Oil Minister Ali Naimi told reporters.
U.S. Energy Secretary Spencer Abraham described OPEC's decision as "welcome news." U.S. State Department spokesman Adam Ereli said it would result in "much needed oil supplies."
Claude Mandil, head of the Paris-based International Energy Agency, said the decision "means that the producing countries recognize that production matters. Production is important in order to calm the markets.
"At the same time, we think the most important (thing) is not quotas, it's not targets," he added. "What is really important is real extra barrels."
Prices have escalated in recent weeks despite OPEC's efforts to meet market requirements, the group said in a statement. Geopolitical tensions, stronger than expected demand in China and the United States, and stricter U.S. specifications for gasoline have all contributed to higher prices, it said.
"Combined, these factors have led to unwarranted fear of a possible future shortage of crude oil, which has, in turn, resulted in increased speculation in the futures markets with substantial upward pressure on crude oil prices," OPEC said.
Although OPEC lifted its production ceiling, it refrained from explicitly urging its members to produce actual barrels of additional oil. In his opening address at the meeting, OPEC President Purnomo Yusgiantoro of Indonesia called on members to do "as much as they can to help stabilize the oil market."
The group's members are already exceeding their individual quotas by at least 2.3 million barrels a day, and Purnomo suggested that the total increase of 2.5 million barrels in the ceiling would essentially legitimize the current overproduction.
Yet, Nigeria's representative said the higher ceiling would, by itself, help reduce prices.
"To act as responsible members of the world community, we have to make this strong signal to the market that we are ready to produce to cool the system," Edmund Maduabebe Daukoru told reporters.
At the same time, OPEC is wary of pumping too much oil and creating a supply glut. Iranian Oil Minister Bijan Namdar Zangeneh, explaining why the group decided to raise the ceiling in two steps, said: "We believe there is not any shortage in the market, and we should be very careful about the coming months."
OPEC produces more than a third of the world's crude. Earlier signals that the group would raise both its ceiling and its actual output had the intended effect of trimming record prices.
U.S. crude for July delivery had finished at $42.33 a barrel on Tuesday -- the highest settlement price in the contract's 21-year history on the New York Mercantile Exchange -- following a terrorist attack in the Saudi oil hub of Khobar that killed 22 people, mostly foreign oil workers. The attack -- blamed on the al-Qaida terrorist network -- stunned markets, which were already nervous about stretched oil inventories and Middle East tensions.
But prices fell about 6 percent on Wednesday as Saudi Arabia said it had backing for its proposed production increase and they slipped again Thursday. Contracts of U.S. light crude for July delivery fell 68 cents to settle at $39.28 a barrel in New York. In London, July contracts of Brent crude dropped 46 cents to settle at $36.40 a barrel.
Analysts predicted the increase in OPEC's ceiling would have only a modest effect on crude prices in coming weeks.
"Who cares about the quotas?" said Adam Sieminski of Deutsche Bank in London. "The important thing is what the Saudis are doing with their volumes and what others are doing with production as well."
Under pressure from the United States and other major importers, Saudi Arabia has already boosted its actual output by 600,000 barrels a day, independently of OPEC. Saudi Arabia has the world's largest proven oil reserves and is the only OPEC member with capacity to pump significant amounts of fresh oil.
The United Arab Emirates announced Wednesday that it would raise production by more than 400,000 barrels a day, while Kuwait said it would increase output by 100,000 barrels.
Still, motorists won't be paying much less for gasoline anytime soon, analysts said, especially with demand rising during the peak summer driving season.
"Gasoline prices are still going to stay high," said Jamal Qureshi, of the Washington-based consultancy PFC Energy.
OPEC aims officially to keep oil prices within a range of $22 to $28 for its benchmark blend of crudes. However, prices have exceeded this upper limit since December.
Purnomo told a news conference OPEC had no plans to change its price target, but said the group was reviewing its preferred price range in view of inflation and a weakening of the dollar. Oil is bought and sold in dollars, and several OPEC members have complained they are losing revenue by not increasing their price target.