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OPEC Leader: Increase Output; Most Ministers Argue Production Capacity is Lacking

Posted on: Wednesday, 21 September 2005, 15:00 CDT

VIENNA, Austria -- OPEC should increase its output ceiling this week, even amid signs of slowing demand, to show the world that it is concerned about near-record oil prices, the cartel's president said -Sunday ahead of a key policy meeting.

Sheik Ahmed Fahd Al Ahmed Al Sabah, who is also Kuwait's oil minister, said the Organization of Petroleum Exporting Countries may even need to act again before the end of the year as U.S. refineries hit by Hurricane Katrina recover and the Northern Hemisphere's winter sets in.

"We think we need to send a message to everybody there will be extra oil in the market -- we've accepted the idea -- to stabilize the price," Sheik Ahmed said.

OPEC is poised to increase its output ceiling, currently 28 million barrels a day, by 500,000 barrels a day.

Oil Minister Ali Naimi of Saudi Arabia, the OPEC member with the best capacity to increase production, has said he supports a ceiling hike, but that he also did not see demand for more crude. He did not specify the size of the increase.

Sheik Ahmed said that while the market currently is oversupplied by 1.5 million barrels a day, and there are indications demand for crude is slowing, a further increase of the output ceiling may be needed as the high-demand winter season approaches and refining capacity knocked out by Katrina is restored.

"I think in November some refineries will come back in the south of the United States, and if the winter is cold, we have to do our best to increase real production," he said.

He said OPEC had 1 million barrels a day in extra production, but would not say how much the possible quota increase later this year would be.

OPEC was originally expected to make its output decision today, but that has been delayed until Tuesday to accommodate a celebration of 40 years since it moved its headquarters to Vienna, as well as ministerial talks on a new long-term strategy.

Previous OPEC increases have done little to ease market fears over supply, and any increase is widely regarded as meaningless because it merely sanctions existing production.

The ministers were in agreement that the market was well- supplied and pointed to a refining problem, rather than a lack of crude.

Venezuelan Oil Minister Rafael Ramirez said his country was not opposed to an increase in OPEC's output ceiling, but said such a move would be largely symbolic.

"That would make no difference to the market," he said.

However, Ramirez said refining capacity was "very big problem," in part because of damage from Katrina.

Qatar's Oil Minister Abdullah bin Hamad al-Attiyah said $60 a barrel was a high price for crude and that OPEC was not trying to protect it.

"I believe it's a high price. It's not our intention to protect $60; we're not aiming for that," al-Attiyah said. "If we were, we would have made another decision."

Al-Attiyah said the problems with U.S. refineries being off-line since Katrina hit were temporary, but the capacity "will take a few months to get back to full production."

"The problem today is the shortage of products, not crude oil," he said.

He said that while he doesn't see any reason for increased production as there was no strong indications of higher demand, "I would support whatever we can do to stabilize the market. Our message is to make sure there's no shortage of crude in the market."

But he noted a 500,000 barrels a day ceiling increase would provide little more than "psychological support."

There appears to be increasing volumes of unsold heavy, sour crude that the U.S. doesn't need, creating a dilemma for OPEC.

"The oil problem is clearly downstream -- insufficient refinery capacity," said -Johannes Benigni, president and CEO of PVM Oil Associates of Vienna. "Already OPEC members find it difficult to find a market for their crude oil; they're really struggling to place their barrels."

Because of a surplus of crude and lack of refinery capacity, "we may expect a significant increase in U.S. commercial crude oil inventories even if OPEC does nothing," he said. "Refinery tightness is going to keep prices high."

Prices soared above $70 a barrel after Hurricane Katrina slammed into the U.S. Gulf Coast, a major oil production hub. With motorists feeling the increase at the gas pump, the ministers have repeatedly said that OPEC is doing all it can to keep the market well- supplied.

But there is concern that high prices have weakened demand. Prices hit their lowest levels in five weeks Friday, with light, sweet crude for October closing at $63 on the New York Mercantile Exchange, the lowest level since Aug. 5. Gasoline closed at $1.7851 a gallon, the lowest since Aug. 3.

Source: Columbian

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