In one sense, OPEC deserves the laurels. The decision undoubtedly calmed market fears of supply shortages in the short run. Reassured, traders gave a muted response to potential and actual supply disruptions in the weeks following the Beirut gathering – Iraqi outages, strikes in Nigeria and Norway, terrorism in Saudi Arabia. The irony is that the 2 million-b/d quota increase promised from 1 July, and even the 2.5 million b/d extra due by 1 August, will not require OPEC to pump a single additional barrel of crude. All the raised ceiling means for OPEC is formalisation of rampant overproduction. Excluding Iraqi output, production hit about 26.5 million b/d in May and is likely to have risen above the 27 million-b/d mark in June.

The disproportionate impact of the quota increase illustrates the extent to which market sentiment is adding a premium to crude prices. Geopolitical uncertainty and market speculation are widely blamed for sky-high prices. ‘If you look at where inventories are, yes, gasoline is tight, but sentiments still appear to be adding a premium of anywhere up to $7 a barrel to prices,’ says Neil Morton, analyst at Dresdner Kleinwort Wasserstein. Certainly, oil markets have been through a turbulent couple of years, with the world’s political disruptions having a nasty habit of concentrating themselves in major oil-producing states.

Saudi Arabia is accustomed to living in a turbulent region. Security at oil facilities has been tight since the Iranian revolution in 1979, and three wars since fought on its borders have strengthened the precautions. Nevertheless, the apparent shift by militants in the kingdom to targeting oil infrastructure – signified by the attack on a petrochemicals facility in Yanbu in early May – sent a shiver through the market.

Insurgents in Iraq are choosing the same target. Sabotage in mid-June knocked both northern and southern export pipelines out of action, removing about 1.6 million b/d from world supply – a development greeted with surprising equanimity by the market. Incoming Oil Minister Thamir Ghadban has set a production target of 3 million b/d by the end of 2003. But such attacks and the slower-than-expected progress of reconstruction make that aimsound ambitious, to say the least.

The Middle East is not the only source of supply fears. One reason for tightness in US product markets is the parlous state of Venezuela’s hydrocarbons industry. Output has never recovered from the late 2002 strike, which crippled state oil company Petroleos de Venezuela (PDV) – production remains 700,000 b/d below pre-strike levels. And a new threat has appeared in the form of a referendum set for August on President Chavez’s rule. Apart from threatening further instability, this is also diverting much-needed PDV revenues into the political campaign coffers. Caracas is highly unlikely to find enough left over for the $5,000 million of investment earmarked for 2004 – part of a project to raise output to 5 million b/d by 2009. Whether spending will even be sufficient to stem dwindling production is doubtful. Such is the maturity of Venezuela’s oil fields that $2,000 million a year is needed to cope with well decline rates of so