Crude Settles at All-Time High Despite OPEC Pledge

Published March 17, 2005

| FoxNews.com

Crude prices soared to a new settlement high above $56 a barrel Wednesday after a U.S. government report showed a sharp drop in domestic supplies of gasoline and heating oil.

The market was unimpressed with OPEC's (search) decision to boost output by 500,000 barrels per day because members of the oil cartel supposedly bound by its production quota are already exceeding the previous ceiling by about 700,000 barrels a day, meaning no extra supply will actually be added.

Light, sweet crude for April delivery settled up $1.41 ato $56.46 a barrel on the New York Mercantile Exchange (search).

The highest Nymex settlement price for crude futures had been $55.17, set twice in October.

While oil prices are 50 percent higher than a year ago, futures would need to climb above $90 a barrel to approach the inflation-adjusted peak set in 1980.

U.S. gasoline inventories fell 2.9 million barrels in the week to March 11, compared to analysts' expectations for a fall of 0.8 million barrels.

The stock fall comes as winter ends and oil traders turn their attention to motor fuel ahead of the peak demand summer driving season in the United States.

Earlier Wednesday, OPEC ministers agreed to start pumping an extra half-million barrels of oil a day within two weeks and held out prospects of a similar boost later if needed.

The move reflected OPEC concerns about the next cold season. Trying to ease worries, OPEC's president, Kuwaiti Oil Minister Sheik Ahmed Fahd Al Ahmed Al Sabah (search), told reporters that at full capacity — and including Iraq, which is exempt from OPEC quotas while rebuilding — the oil-producer group could pump some 31 million barrels a day.

That would represent a daily increase of about 1.5 million barrels from present levels.

The decision to boost output beginning April 1 will officially raise the group's ceiling to an all-time high of 27.5 million barrels a day.

But with Iraq and quota-busting factored in, OPEC is already producing close to 29.5 million barrels.

OPEC officials conceded the group's decision was driven by concern of potential shortfalls come next winter, when demand for oil and refined products is traditionally high.

"The industry is very scared of the second half" of the year, said an official at the meeting, who demanded anonymity.

In past years, OPEC output hikes have normally dampened prices, by sending the message that supply is available to meet demand.

This time though, the move only reflected realities — members bound by the quota already produce about 700,000 barrels a day above the group's official ceiling.

And instead of taming markets, the timing of the increase raised questions about next time. Most forecasts predict even greater world demand in the future.

"Market reaction has been almost nil," said Frederic Lasserre, head of commodities research at SG Securities (search) in Paris. "The market is very concerned that even the Saudis might be short of spare capacity by the end of the year."

Estimates vary but most surveys put OPEC's spare capacity between 1 million to 1.5 million a day. Most of it is Saudi oil, which needs more refining than the preferred "sweet" crude produced by some other OPEC members. Oil production by states outside OPEC is stagnating.

With western economies generally expanding, demand soon could outstrip supply. The economic boom in China is already sucking up more than a third of the world's crude supplies. India's hunger for oil is also on the rise. At some point — no one has come up with a firm figure — the market would price oil so high that economies would begin to contract and demand would fall.

"We have to face facts. The International Energy Agency has raised demand estimates to 84.3 million barrels per day and that exactly equals worldwide daily consumption," said analyst Phil Flynn in a newsletter. "We're at total equilibrium."

"OPEC has reached its production limits," Algerian Oil Minister Chakib Khelil said over the weekend. "If it came to a crunch, it has capacity for 1 million barrels."

Reuters and the Associated Press contributed to this report.

URL

http://www.foxnews.com/story/2005/03/17/crude-settles-at-all-time-high-despite-opec-pledge