OPEC Agrees to Raise Oil Output

Seeking to lower oil prices from the current $40-a-barrel range, the Organization of Petroleum Exporting Countries agreed today to raise its oil output ceilings by about 8 percent in July and an additional 2 percent in August.

The move, announced by OPEC at the end of a meeting in Beirut, followed several days of public assurances by officials of the cartel's countries that they intend to prevent the recent surge in prices from dampening the global economic expansion. But world oil markets have been unnerved by the prospect that terrorists might disrupt global production at a time of soaring demand and tight gasoline inventories. And since many OPEC members are already producing above their quotas, the group's decision won't add enough to supply to have a meaningful impact in the near term, analysts said.

As a result, prices headed higher after the announcement, although they were still well below the records set Tuesday, which came in reaction to the killing of 22 foreign workers in Saudi Arabia's main oil-production zone. At mid-morning, July contracts for U.S. benchmark crude were up 41 cents, to $40.37 a barrel, on the New York Mercantile Exchange.

The OPEC announcement that it will raise the group's quotas by 2 million barrels a day in July and another 500,000 barrels a day in August "is middle ground," said Simon Wardell, senior energy analyst at the World Markets Research Center in London. "It's not a bad increase. But they could have announced a higher increase, which would have sent the message to the market that they really want to force prices way down." The upshot, he said, is that "I think we can expect prices to stay high -- not necessarily over $40, but at least in the high 30s."

The reason the organization's members did not announce a higher increase, Wardell said, is presumably that they want to hold back some of its spare capacity "so they can have another psychological impact" if they wish at their next meeting, which is scheduled for July 21. Moreover, some OPEC members are fearful that because so much of the recent price hike is psychological, a major boost in supply could cause prices to crash. That is what happened in 1997, when a sizeable production increase was announced shortly before the Asian financial crisis.

Eventually, higher production will cause prices to soften, experts predicted, although the impact will not likely be felt until after the high-demand summer driving season.

Adam Sieminski, an oil analyst with Deutsche Bank in London, said that "the country to pay attention to is Saudi Arabia," which is the only nation with significant amounts of spare capacity. "They're increasing their volumes, they say they want lower prices, and unless something ugly happens there in terms of terrorism, I think the Saudis are going to get their way."

But in a note to clients, Sieminski added: "Tense geopolitics -- and persistent U.S. gasoline tightness [in supply] that OPEC can't reverse in the near term, could stall" any downward move in prices.