OPEC boosts production target by 1 million barrels a day
In an attempt to prove it can still influence the global oil market, OPEC boosted its production target by 1 million barrels a day and began lobbying oil producers that aren't part of the cartel to follow suit.
The group, which announced the 4 percent increase in its production target during a meeting Wednesday, meets again on Thursday and Friday with energy industry leaders, including oil companies and agencies, in an attempt to boost global oil production.
Because the cartel, which produces about a third of the world's oil, already pumps more than the new, increased target of 27 million barrels per day, which takes effect November 1, Wednesday's move was seen largely as a symbolic gesture.
Even OPEC delegates acknowledged the target boost won't make oil less expensive.
"It's a gesture of goodwill to the consumers that we want lower prices," Algerian Oil Minister Chakib Khelil said.
"We will give a signal to the market that we are working hard for the stability of the market," said Kuwaiti Oil Minister Sheik Ahmad Fahad al-Ahmad al-Sabah.
Despite the move, and hopes it would lower prices, crude futures prices rose toward US$45 a barrel Wednesday as Hurricane Ivan roared toward the U.S. Gulf Coast with 217 kph (135 mph) winds and after the U.S. government reported a sharp drop in the nation's oil supply from a week ago.
OPEC's decision to raise its official output target by 1 million barrels a day did little to soothe oil markets.
Light sweet crude for October delivery rose 33 U.S. cents to US$44.72 per barrel on the New York Mercantile Exchange. In London, October Brent crude futures ticked 47 U.S. cents higher to US$42.20 per barrel on the International Petroleum Exchange.
Leo Drollas, chief economist at the London-based Center for Global Energy Studies, argued the decision "is not going to help the market at all."
"It's a PR exercise to prove to the consumer that OPEC actually likes them," he said.
But Indonesia's Purnomo Yusgiantoro, OPEC's president, insisted that the action would make oil cheaper. The cartel's director of research, Adnan Shihab-Eldin, argued that prices would start to fall after stocks had built up to normal levels, something he said would happen this winter, barring unforeseen cold weather.
Purnomo also called on non-OPEC oil producers to "cooperate with our organization's market stabilization measures," saying creating a balanced market was "the responsibility of all producers."
Russia and Norway, the world's second- and third-biggest oil exporters and steadfastly independent, offered no indication they would heed the call.
Thorhild Widvey, Norway's oil minister, who will speak to OPEC this week, has said the Nordic country, which produces approximately 2.9 million barrels a day, has no spare capacity.
Russian Oil Minister Andrey Greus also offered no commitments.
"We are interested in the stability of prices and more predictability," he said through a translator.
OPEC claims it has 1.5 million barrels per day in immediate spare capacity, and that more is coming in the medium term.
But analysts assert that excess capacity is in the form of heavy crude, not the sought-after light crude.
"OPEC does not have excess capacity," energy economist and industry analyst A.F. Alhajji said, arguing that Saudi Arabia had twisted figures to claim that it has spare capacity, and that the Saudi oil was "heavy crude, and the market needs light crude."
Saudi Oil Minister Ali Naimi said his country has 1.5 million barrels of spare capacity.
OPEC also discussed its price band for its basket of crudes, currently at US$22 to US$28, but postponed a decision on it until a meeting Dec. 10 in Cairo, Egypt. Prices have long been well above the upper end of the band, which is the cartel's preferred selling range.
OPEC's basket price, currently in the US$39 a barrel range, is lower than prices in the U.S. because that market require a higher grade of product.
"OPEC realizes the band has to be adjusted," Purnomo said, adding the adjustment "should be upward, not downward."
Drollas argued the discussion about the band was moot.
"They've never taken it seriously," he said. "Most of countries in OPEC have been selling oil to those who want to buy it for as long as anyone can remember."
Any effect the band has on the market is because of traders' behavior, Alhajji argued. Prices in the lower parts of the range sent traders buying because they expected that OPEC would cut production, as the band mechanism prescribes.
"They did the dirty job of OPEC," Alhajji said of the traders and speculators.
World demand for oil has been voracious, led in part by China's expanding economy and continued demand in the United States. Oil prices have soared because of the extremely thin margin of spare output capacity worldwide and fears of supply disruptions around the globe.
Analysts say OPEC vastly underestimated the growth of demand this year. Now it seems the group lacks the ability to increase production quickly enough to bring prices down. Though the cartel's members are enjoying the windfall of tens of billions of dollars in extra oil revenue this year, they also worry that prices could rise so high that they derail the world economic recovery, hence damping future demand.
The cartel's next regular meeting will be in Iran in March.