Riding the rollercoaster oil prices

07 June 2004
OPEC has announced plans to raise production quotas to 26 million barres a day (b/d), after a week in which US benchmark crude futures peaked at $42.25 a barrel following the terrorist attacks in Al-Khobar. The two-stage increase will include a 2 million-b/d rise in quotas in July and an additional 500,000 b/d in August. Market tensions were running high as the 3 June meeting in Beirut approached, with crude futures diving by $2.37 in the previous day's trading before firming up amid rumours of differences of opinion from the conference hall.

Despite the intense international scrutiny, OPEC members warn that beyond the immediate psychological impact of a quota hike, the organisation has limited sway over oil prices. 'Today's prices have nothing to do with the fundamentals of the oil market,' Saudi Petroleum & Mineral Resources Minister Ali Naimi said shortly before the summit. 'Increasing production will not necessarily solve the problem, but we need to reverse the perception of shortages, and this is what we will work for.' Although the 3 June decision marks the largest increase since OPEC raised its quota by 3.4 million b/d in early 1989, analysts say oil markets had factored in the latest 2.5 million-b/d increase in advance of the meeting. Production increases are also likely to be limited, although three Gulf producers have indicated that they can pump another 2 million b/d if stretched to capacity.

The concern of many members is that by pushing production close to capacity OPEC leaves itself with little room to manoeuvre in an emergency. 'The fear is a downturn in the market, so we have to be very careful, especially after what happened in 1997-98, when OPEC increased its ceiling,' said Naimi. Oil prices then fell from about $24 a barrel in London to $10 a barrel. The principal worry for producers is that a rapid drop in oil prices could trigger a crash as speculators rush to sell off crude oil futures.

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