Markets not impressed by OPEC's commitment to boosting output

ISFAHAN, Iran -- OPEC left the intense global thirst for oil unquenched on Wednesday when it raised its output quota by 2 percent, a symbolic gesture that will not add supply to the market. Oil prices climbed to a new high above $56 a barrel.

Driven by fears of a supply crunch next winter, the Organization of Petroleum Exporting Countries agreed to immediately authorize the pumping of an extra half-million barrels of oil a day and to approve a similar boost later if prices do not fall.

But the market took little comfort from OPEC's decision because the group is known to be already exceeding its production ceiling by about 700,000 barrels a day.

Officials from Saudi Arabia and Kuwait stressed that more oil would be available soon, though. They said they will produce at least an additional 370,000 barrels a day by April.

The price of crude futures nevertheless climbed to a new high above $56 a barrel on Wednesday, as traders digested the news from OPEC as well as the latest petroleum supply report from the U.S. government, which showed that domestic supplies of gasoline and heating oil fell sharply last week.

On the New York Mercantile Exchange, light sweet crude for April delivery rose $1.41 to $56.46 a barrel. The previous Nymex settlement peak was $55.17.

OPEC's acting secretary general voiced disappointment at the market's reaction. "It's not the result we wanted," said Adnan Shihab-Eldin. "Prices should have eased."

OPEC oil ministers said they were helpless.

"The market has confused us," said Iranian oil minister Bijan Namdar Zangeneh. His Saudi counterpart Ali Naimi said: "Ask the market why prices went up."

OPEC's decision to look to next winter and raise its quota just ahead of the Northern Hemisphere springtime -- 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 33 percent this year alone.

Gasoline prices are are also soaring, with the U.S. average now $2.06 a gallon.

Edmund Dakouru, a Nigerian oil official, said "the extra oil will go a long way" toward meeting any concerns about next winter's 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 by other nations factored in, OPEC is already producing close to 29.5 million barrels.

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.

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.

Most analysts put OPEC's spare capacity between 1 million and 1.5 million barrels a day. But most of it is heavy oil from Saudi Arabia that is less desirable to refiners than the preferred "sweet" crude.

"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.

At some point 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 (per barrel) this year if we have such disruptions."

The International Energy Agency, which monitors oil market conditions for the Organization of Economic Cooperation and Development, raised its forecasts for 2005 oil demand last week, drawing the picture of a market in which heavy consumption will continue to strain supply.

Other factors pushing oil prices higher include the weak dollar, terrorism fears and increased speculation by hedge funds and other well-financed investors.

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Associated Press correspondent Tarek Al-Issawi in Isfahan contributed to this report