Oil Prices Rise Despite OPEC Move

OPEC spoke but oil markets shrugged, as the cartel’s decision Wednesday to lift its official production levels failed to keep the price of crude from rising again.

The increase in the output ceiling was expected, and viewed as mostly symbolic, because the Organization of the Petroleum Exporting Countries already is pumping well in excess of its new official quota.

Even so, OPEC ministers meeting in Vienna raised the cartel’s formal production limit by 500,000 barrels a day, to 28 million, as of July 1 if only in hopes of talking down oil prices from their near-record highs, analysts said. OPEC also authorized its president, Sheik Ahmed Fahd al Ahmed al Sabah of Kuwait, to launch talks on boosting production by an additional 500,000 barrels a day by Sept. 19 if prices don’t subside.

But with OPEC already pumping nearly 30 million barrels a day, the increase in its official quota “is just a cosmetic statement,” said Stephen Leeb, president of Leeb Capital Management Inc. in New York. “OPEC already is essentially producing at 100% capacity.”

After OPEC’s meeting, the price of the U.S. benchmark light sweet crude for July delivery rose 57 cents to $55.57 a barrel after trading as high as $56.75 on the New York Mercantile Exchange.

The price is now within $2 of its record Nymex close of $57.27 a barrel, reached April 1.

The indifference to OPEC’s fifth production increase in the last year offered little hope that consumers and businesses would see any immediate relief in energy costs, although the high prices haven’t dented their growing thirst for oil and refined products such as gasoline and diesel fuel.

Crude oil accounts for about half the price of gasoline. Average prices for regular gasoline in California have steadily fallen for the last two months, to about $2.33 a gallon, but they’ve recently turned higher nationwide.

The prospect of a production boost by the 11-nation cartel, which supplies more than one-third of the world’s oil, might ordinarily raise fears of an oil glut that could send prices lower. But this time, demand for oil and refined fuels remains so high that commodities traders are more concerned about a potential shortage. That’s keeping pressure on OPEC and other suppliers to produce as much oil as possible.

Oil prices received an additional boost Wednesday from the Energy Department’s weekly report of U.S. oil and gasoline inventories, which showed crude supplies fell 1.8 million barrels, or 0.5%, to 329 million. Gasoline stockpiles dropped by 900,000 barrels, or 0.4%, to 215.7 million, the agency said.

Even with those declines, supplies of oil and gasoline were still above year-earlier levels. But the report also showed that average U.S. demand for gasoline over the last four weeks had risen 3.3% from a year ago, and demand for distillates such as diesel and jet fuel had jumped 6.5%.

“The crude draw was expected, with refiners running hard,” Jan Stuart, an analyst at commodities brokerage Fimat USA in New York, told Reuters. “But the demand figures for products are going to spook a few people.”

Indeed, energy traders appeared to be pricing oil and gasoline more on speculation that supplies could tighten further than on current inventories, which OPEC and some analysts said were relatively ample, observers said.

“The market continues to be well-supplied,” OPEC said in a statement. But it acknowledged that oil prices “remain high and volatile” because of concerns over potential supply shortages and little spare capacity among oil refiners.

With refiners already operating nearly flat out, traders fret that any disruption could send prices soaring. They’re also worried about whether energy supplies would be sufficient to meet demand in the fourth quarter, when the need for heating oil ramps up.

OPEC ministers this week said they would like to see crude-oil prices drop back closer to $50 a barrel or lower. They’re concerned that if prices stay too high too long, it could create serious problems for the economies of the United States and other industrialized nations, raising a threat to demand for the cartel’s oil.

But Leeb said that was exactly what had to occur for prices to fall significantly.

“Nothing short of a slowdown in demand is going to reduce the price of oil,” said Leeb, author of the 2004 book “The Oil Factor,” which predicts a turbulent era in which oil demand far exceeds supply and petroleum prices rise as high as $100 a barrel.

“You’re simply at a point,” he said, “where demand is outstripping supply.”