OPEC ministers agree to 1-mil b/d quota hike

OPEC ministers agreed Sep 15 to raise their crude output ceiling by 1-mil b/d to 27-mil b/d from the beginning of November in a move that partly formalizes current production levels but will not put new barrels on world oil markets. A Platts survey last week estimated production by the ten OPEC members bound by quotas at 27.97-mil b/d in August, close to 2-mil b/d above the current 26-mil b/d ceiling.

Oil prices in London and New York were little changed as a result of the OPEC decision but surged upwards shortly afterwards on the 7.1-mil barrel draw in US crude stocks announced by the US energy department before falling sharply as falling NYMEX natural gas prices dragged crude down. A communique issued as the OPEC talks ended said the decision to raise the ceiling was part of the group's efforts "to bring prices down to more sustainable levels."

Algerian oil minister Chakib Khelil, who had campaigned for the ceiling and quotas to be temporarily suspended, said he saw prices coming down eventually "but not very fast." Libyan oil minister Fathi ben Shatwan said he expected the deal to have only a "psychological" impact on the market and no "material" effect on oil supply. Kuwait's Sheikh Ahmed Fahed al-Sabah, who becomes OPEC president for a year from January 2005, said the agreement would "give a good signal to the market that OPEC is working hard for the stability of the market."

OPEC's chief strategist, Adnan Shihab-Eldin, said he believed the decision to raise the ceiling would have an impact once the high-demand winter season ended, saying he expected a "significant moderation" in oil prices after that time. Already, he said, OPEC's output boost in the second quarter was showing up in OECD stock levels which were now close to normal. Further output boosts from OPEC over the third quarter would maintain OECD stocks at normal levels "even in the coming winter season," he said.

But analysts, speaking before the deal was announced by ministers, suggested the impending increase in quotas would have little impact on the physical supply of oil. "It won't put more barrels on the market," said Vera de Ladoucette of Cambridge Energy Research Associates.

Raad Alkadiri of Washington-based analysts PFC Energy said some OPEC members "want to send what they think will be a calming signal to the market. [But] I am not sure the markets are that misunderstanding of supply and demand," he said. "In reality what we have is a tight products market that is bringing up the complex. It's not a lack of OPEC crude that is bringing up the prices."

Many OPEC members are already pumping at or close to maximum capacity, and Indonesia and Venezuela have been pumping well short of their current quota in recent months.

Some analysts have suggested Iran's new quota--which Platts calculations peg at just above 3.96-mil b/d--is also getting close to the country's full capacity. But Iranian oil minister Bijan Zanganeh said his country would have no problem meeting its allocation. "We have no difficulty" in meeting the new quota, Zanganeh said. Saudi Arabia, the cartel's largest producer and holder of the bulk of the available spare capacity, plans to maintain its current crude output level of 9.5-mil b/d during October, Saudi oil minister Ali Naimi said. The Saudi quota will rise to around 8.78-mil b/d from Nov 1.

Ministers have deferred until the Cairo meeting any decision on changing their target price band of $22-28/bbl. OPEC's current president, Indonesian oil minister Purnomo Yusgiantoro, said ministers were agreed on the need to raise the band but not on a specific range. A committee mandated to study the issue will present recommendations to the Cairo meeting, he said.

But OPEC heavyweight Saudi Arabia's Naimi said he saw no reason to change the band for the time being. "If there is real structural change in the market, it warrants to look at the band. I believe we have not seen [such a change]," he said. OPEC will hold its next ordinary meeting March 16, 2005, in Iran at Caspian Sea resort Mahmoud Abad. OPEC has not met in Iran since before the 1979 revolution.

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