Friday, June 04, 2004
OPEC - Attempts to Lower Prices
BEIRUT, June 3 - The Organization of the Petroleum Exporting Countries agreed on Thursday to increase its production quotas by two million barrels a day, or 8.5 percent, effective July 1. Industry experts gathered here for OPEC's meeting said that the decision sent a tepid message to oil markets about the group's commitment to lowering prices, which have been around $40 a barrel.
Traders responded to the news by bidding up the futures price of oil almost 70 cents a barrel on the New York Mercantile Exchange, but prices dropped later in the day when new Energy Department statistics showed growing supplies of oil, gasoline and other distilled fuels in the United States. Crude oil for July delivery settled in New York at $39.28 a barrel, down 68 cents from Wednesday.
Analysts said the problem with OPEC's move was that it would not add any new oil to the market. As a group, OPEC is already overproducing its declared ceiling of 23.5 million barrels a day, set in March, by at least 2 million barrels. Increasing the quota merely legitimizes what is already happening, they said.
The 10 voting members of OPEC - voting rights of Iraq, the 11th member, have not been restored yet - said they would raise daily quotas by an additional 500,000 barrels on Aug. 1. The group is scheduled to meet again on July 21 in Vienna to review market conditions."They're not doing anything," said Roger Diwan, managing director of PFC Energy, a Washington consulting firm. "There's no sense of urgency." Referring to the probable effect on prices, he added, "It's a bullish signal to the market; if you were expecting a change of policy in Beirut, come again." The thinking within OPEC may have been best summed up by the Algerian oil minister, Chakib Khelil. In an interview, Mr. Khelil said that there was already enough crude oil in the world, and that other factors besides the supply were responsible for the high prices. But OPEC, he said, nevertheless needed to send a message to the market that it, too, was concerned about the run-up. "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?" Even so, said Michael Fitzpatrick, vice president for energy risk management at Fimat USA, a New York brokerage house, "the OPEC decision is a little disappointing" because it will have little practical effect on supplies. Mr. Fitzpatrick said prices fell on Thursday afternoon because "people were looking past the meeting" and focusing on the strong inventory figures in the United States, which were attributed in part to the largest oil and gasoline imports in nearly two years. That inventory growth may be the first tangible sign of increased output, outside official OPEC quotas, from Saudi Arabia, the only producer with significant spare capacity. Almost all other countries are already pumping at capacity. The Saudis said on May 23 at an industry conference in Amsterdam that they would step up their production, at the same time calling for OPEC to increase its quotas by 2.5 million barrels a day. To them and some other members of the group, a sustained price of $40 a barrel or more poses the threat of slowing global economic growth and weakening the demand for oil.
Energy Secretary Spencer Abraham expressed a similar view in a statement Thursday welcoming the OPEC decision and saying that "oil-producing and consuming countries have shared interests and mutual responsibilities in fostering economic growth." According to Vera de Ladoucette, senior director for Middle East Research with Cambridge Energy Research Associates, a consulting group, Saudi Arabia could pump as much as 9.1 million barrels a day in June, compared with 8.3 million barrels last month, adding that this could go even higher later in the year. But analysts said the market might have been looking for a stronger stand from OPEC as a group, and not just the Saudis. "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."
Mr. Aljibury and others said Iran might have dug in its heels against endorsing the full increase of 2.5 million barrels a day proposed by the Saudis. Iran, which usually advocates high prices, has no spare capacity, analysts said, so it stands to gain nothing from an increase in quotas. OPEC is also hesitant to open the taps all the way because of the view that the recent run-up in prices had relatively little to do with production levels. Rather, many members say, worries about political turbulence in Iraq, Nigeria and Venezuela and terrorist attacks in Saudi Arabia, like the one in Khobar last weekend, have added $6 to $8 a barrel to the wholesale price of crude oil. Analysts said a number of OPEC countries also feared that increasing production could create a glut once these worries subsided, leading to a sharp price decline. Whether Thursday's decision will have any lasting effect on oil prices will not become clear for several weeks, given Saudi Arabia's decision to step up output and the time lag between production and delivery.
The outcome of the meeting does indicate that all OPEC members, including Saudi Arabia, are much more comfortable with high oil prices than their customers are. "No one ever got fired for making too much money," an oil trader, who spoke about OPEC on condition of anonymity, aid. "Their budgets are doing great. You see it everywhere in these countries, with all the new building going on" in the United Arab Emirates and Saudi Arabia.
