OPEC agrees to make automatic increase in oil output ceiling, cancels planned meeting

Friday, July 16th 2004, 6:24 am
By: News On 6

LONDON (AP) _ OPEC hopes to put a lid on stubbornly high crude prices by adding 500,000 barrels a day to its targeted output, but high worldwide demand for oil and a dearth of spare production capacity could spoil its plans.

With most members of the cartel already pumping all they can, analysts worry that a disruption in crude shipments from a major producer could raise prices to damaging new heights.

Indeed, some observers estimate that the world has little more than 1 million barrels in spare capacity remaining _ a small cushion if shipments stop suddenly from places like Iraq.

``I think these are dangerous times. The danger is that a supply disruption at this stage would create unprecedented problems and unprecedented prices,'' said Peter Gignoux, a London-based oil adviser for GDP Associates.

Already the price of crude has been hovering around an uncomfortable $40 a barrel for more than two months. On Thursday, the Organization of Petroleum Exporting Countries decided to raise its daily production target by 2 percent, or 500,000 barrels, in an effort to keep prices from spiraling higher still. The cartel pumps more than a third of the world's oil.

OPEC made the increase automatic by mutual agreement, and canceled a formal meeting it had planned for its members on July 21 at its headquarters in Vienna, Austria, said Purnomo Yusgiantoro, the group's president. The increase will take effect Aug. 1.

Although oil-exporting countries are happy to maximize profits, OPEC and its de facto leader Saudi Arabia worry that global economic growth and the long-term demand for crude could suffer if prices soar higher.

Contracts of U.S. light crude for August delivery fell 20 cents to settle at $40.77 a barrel on the New York Mercantile Exchange.

But few analysts expect lower prices to last, noting production is already above quota and oil markets had already factored the output increase into prices.

``The increase itself has been telegraphed in the same fashion that dropping a brick on someone's toe gives a hint,'' said Jan Stuart of New York brokerage FIMAT USA.

OPEC agreed last month to make a two-step increase in its output ceiling to try to calm oil markets, which are jittery over pipeline attacks in Iraq and terrorism in Saudi Arabia.

The group decided to raise its ceiling by 2 million barrels on July 1 and to follow with the 500,000-barrel increase if market conditions warranted.

Supply concerns have contributed to strong prices since then. Chronic strife in Venezuela and Nigeria, legal problems for Russia's biggest oil company Yukos, and recurring sabotage on pipelines in Iraq have added to fears of a shortage.

``The only stabilizer we've got left is Saudi Arabia. They're doing 100 percent of the work right now in keeping the oil market as stable as is possible,'' said Paul Horsnell of Barclays Capital in London.

Saudi Arabia, which now pumps around 9.1 million barrels a day, is the only producer with significant flexibility to pump more.

After consultations Wednesday, OPEC decided to proceed with the Aug. 1 increase ``in order to maintain adequate supply to the market and support the continued, robust, global economic growth,'' Purnomo said in a statement.

OPEC's production ceiling is now 25.5 million barrels a day, rising next month to 26 million barrels.

The Paris-based International Energy Agency estimates that OPEC produced an average of 26.9 million barrels a day in June _ or 3.4 million barrels above its target at the time.