OPEC Decides Not to Cut Production Quotas

By Steven Mufson
Washington Post Staff Writer
Friday, June 2, 2006

Ministers from the Organization of Petroleum Exporting Countries said at their meeting in Venezuela yesterday that the oil group that produces 40 percent of the world's oil would keep its production quotas unchanged at 28 million barrels a day.

"At this level of prices, the market is very sensitive," Qatar's Abdullah bin Hamad al-Attiyah told reporters in Caracas yesterday, Bloomberg News reported. "We have to be very careful. We don't want the price to get out of control."

But oil traders and analysts took little comfort from OPEC's commitment, noting that the cushion between world supply and demand remained uncomfortably thin. Moreover, they said, the oil producers were unlikely to reduce output when they could cash in on record high prices that many consumers think are already out of control.

"Nobody expected that at these prices they'd cut back," said Edward Morse, executive adviser of Hess Energy Trading Co. in New York.

The only OPEC member pushing for cuts in output quotas was the meeting's host, Venezuela, but oil traders noted that Venezuela probably favored a cut in quotas because it has been unable to produce enough oil to meet its share of the organization's quota allotments. Morse estimated that Venezuela, OPEC's third-largest producer, was falling at least 300,000 barrels a day short of its quota because of technical problems it has had since an oil workers strike three years ago and more recent disputes with foreign operators.

Crude oil for July delivery fell 95 cents, but still remained high at $70.34 a barrel.

Sensitive to charges that they have helped drive up oil prices, some OPEC ministers pointed to speculators and traders who are too worried about tension between the United States and Iran over Tehran's nuclear program. Saudi Arabia's oil minister, Ali al-Naimi, said yesterday that the crude oil market was "oversupplied and overpriced," Bloomberg reported. Al-Naimi said world supply exceeds demand by about 1 million barrels a day.

Some investors agree. The manager of one European hedge fund said in a recent interview that he thought the world was "awash in oil."

Others don't see it that way. "There comes a point every year in the second quarter where supply is ahead of demand," said Jacques Rousseau, an oil analyst with Friedman, Billings, Ramsey Group Inc. "It's a seasonal thing. We're out of the winter heating season and not yet in the summer driving season."

"It's in OPEC countries' interest to say that supply is not the problem and that OPEC is living up to its responsibility," said Morse, who noted that May is the month when demand is weakest. "Therefore, they say, it must be something else: speculators, a risk premium or a lack of refining capacity. But clearly the lack of production capacity is a factor in keeping prices as high as they've been."

Most OPEC countries can do little to bring prices down, however. The organization has limited excess production capacity and most of it is in Saudi Arabia, which says it could produce 1.8 million barrels more a day. But even there, about 800,000 barrels a day of that extra supply cannot be used at most of the world's refineries because of its low quality.

Meanwhile, demand continues to run strong. The Energy Department yesterday released figures showing that U.S. demand for gasoline has been running 0.9 percent above last year, despite high prices. U.S. gasoline consumption accounts for roughly 9 million barrels a day, of total world demand of about 85 million barrels a day.

Although the International Energy Agency this year trimmed its estimate for the growth in world oil demand, it still expects an increase of 1.2 million barrels a day.

Rousseau said he expects the oil-market balance to remain tight for years, regardless of what OPEC does.

"Prices will drift down to mid-60s this year and stay at that level next year because world economic conditions are softening somewhat. But it won't be until the next decade that we really drive down the price," he said.

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