OPEC quota rise leaves market unmoved

17 September 2004
OPEC moved to head off intense criticism from consumer countries by raising its production quota by 1 million barrels a day (b/d), effective on 1 November, at the group's 15 September meeting. However, the cosmetic change did little to calm the market, and was offset by a bullish set of US stock data and the impact of Hurricane Ivan in the Gulf of Mexico. Spot Brent was trading at $41.45 on 16 September, the day after the OPEC meeting, little changed from a week earlier.

OPEC ministers, meeting in Vienna, attributed the decision to increase the quota to 27 million b/d to a series of factors pushing prices to their recent highs. 'Higher crude oil prices are a result of such factors as the demand surge earlier in the year, especially in North America, China and Asian countries, geopolitical factors and concern about the adequacy of spare capacity to meet possible supply disruptions, exacerbated by the significant impact of speculators and by tightness experienced in the downstream industry,' read the closing communique.

Ministers also acknowledged the need to bring the quota more in line with actual production, which - excluding Iraq - is running at close to 28 million b/d. 'We did this to narrow the gap between real production and the quota,' Saudi Arabia's Petroleum & Mineral Resources Minister Ali Naimi said after the gathering. Algeria and Kuwait were reported to have lobbied hard for the increase.

The politically charged question of increasing the $22-28-a-barrel target price band was again ducked. The price has not dipped within this bracket since last year. OPEC president and Indonesian Energy Minister Purnomo Yusgiantoro said that speculation was adding $10-15 a barrel, implying that fundamentals would support a price within the target band. 'If that really is the view of ministers, then there should be no need to discuss the target,' says Paul Horsnell, analyst at Barclays Capital. However, the issue will be raised again at OPEC's next meeting, scheduled for 10 December in Cairo.

Aware that the quota change was largely meaningless, the market reaction was muted. On the same day as the meeting, US crude inventory data showed an unusually large weekly draw of 2.5 per cent, taking stocks down to 278.6 million barrels. Hurricane Ivan has also hit the Gulf of Mexico, forcing production to be shut in at several oil facilities.

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