OPEC aims to put limit on 'boiling' price of oil

Posted in Other | 03-Jun-04 | Author: Katrin Bennhold| Source: International Herald Tribune

Statements in Beruit backing Saudis help cool recent surge

Members of the Organization of Petroleum Exporting Countries made a renewed bid Wednesday to ease surging oil prices, signaling their support of Saudi efforts to raise the global supply of oil and announcing steps to augment security at major oil installations throughout the Gulf region.

But even as the pledges pushed oil prices off of record highs, dipping below $40 a barrel on Wednesday, analysts sounded increasingly concerned that OPEC's present moves to step up production capacity could mute the cartel's future power to react to oil price shocks.

At a gathering in Beirut ahead of a formal OPEC meeting Thursday, the United Arab Emirates said it would stretch its oil production to near its full capacity, increasing output by 400,000 barrels a day as of this month. "This aims to put a limit on the boiling prices," Obaid ibn Saif al-Nasseri, oil minister of the Emirates, said on arrival in Beirut, Reuters reported.

The move comes on top of Saudi Arabia's promise to increase production by 700,000 barrels a day. The kingdom, the only other OPEC member with any significant spare capacity, can augment its daily supply of oil by 1 million to 1.5 million barrels daily.

"What we need is a volume that can give a really significant impact to oil prices," said OPEC's president, Purnomo Yusgiantoro of Indonesia.

The announcements helped cool the price of oil, which breached a record $42 per barrel on Tuesday in New York following the deaths of 22 foreign workers in an attack in Saudi Arabia over the weekend.

Crude oil for July delivery dropped $2.37 on Wednesday, or 5.6 percent, to $39.96 a barrel, on the New York Mercantile Exchange. On the International Petroleum Exchange in London, Brent oil fell $2.22, or 5.7 percent, to $36.86.

But analysts questioned how effective OPEC would be in breaking the psychological effect of the terrorist attacks. "Right now the price is determined by demand, but also by security concerns, especially with a U.S. market that is extremely tight in fuel," said Yasser Elguindi, managing director of Medley Advisors, a New York-based consultancy. "So OPEC's ability to reduce the price is very diminished."

The Saudi oil minister, Ali al-Naimi, who has promised to increase production in June no matter what OPEC decides, is backing an increase in the cartel's official output limits of 2.5 million barrels a day, or 11 percent. But even as he sought to reassure markets about the safety of the oil supply, he acknowledged that pumping more oil would not guarantee sustainable lower oil prices.

"Contrary to what some believe, OPEC cannot always control prices," Naimi said, The Associated Press reported. "Prices are controlled by the market and are affected by many factors."

Perhaps more worrisome over the medium term, analysts said, is how much spare capacity the major OPEC producers would have if they opened their spigots to near maximum levels for now in a bid to calm oil prices.

"We're entering a situation where there is practically zero margin for error," Elguindi said. "You can't have any problems with terrorism, OPEC or other oil-producing countries, because there won't be room to compensate."

What's more, the world's thirst for oil appears to be rising, as demand from the United States remains stable and is surging from China. Geopolitical risks are pushing countries to build reserves, adding further to demand.

"We're getting closer to a very tight supply-situation," said Michael Lewis, a commodities expert at Deutsche Bank in London. Analysts say significant investments must be made all along the production chain - in tankers and refineries - to deal with the situation.

In the meantime, some OPEC members said they were enhancing the security of their oil operations.

Kuwait said it was stepping up security at its oil installations and was coordinating with Gulf producers to protect against attacks, the AP reported.

Naimi insisted that Saudi Arabia was taking appropriate steps to ensure the safety of its most important facilities. "The illusion that terrorism threatens petroleum facilities in the world is not true," he said in a speech at the Beirut offices of the UN Economic and Social Commission for Western Asia, the AP reported. "I assure you that installations in the kingdom of Saudi Arabia are secure because they are under intensive protection to prevent such acts."

The attack at Khobar, Saudi Arabia, that killed 22 people, most of them foreigners, raised alarm about the reliability of oil supplies from Gulf producers.