OPEC Raises Output Ceiling; Oil Prices Still Rise

OPEC (search) on Wednesday agreed to increase its daily oil production quota by a half million barrels, but failed to make any immediate dent in crude prices hovering above $55 a barrel.

The output ceiling — now 27.5 million barrels per day (bpd) — will be increased to 28 million barrels as of July 1. The cartel will consider a similar move later this year if needed.

But OPEC ministers offered scant hope they can force prices back below the $50 a barrel that OPEC thinks the world needs to sustain the economic growth that fuels oil demand.

Oil traders were not impressed. Light sweet crude for July delivery rose 57 cents to settle at $55.57 per barrel on the New York Mercantile Exchange (search), putting oil futures roughly 50 percent higher than a year ago. Prices climbed as high as $56.75 earlier in the day.

Wednesday's rally was sparked by the U.S. Energy Department's weekly supply snapshot, which showed U.S. inventories of crude oil fell by 1.8 million barrels last week to 329 million barrels, leaving supplies almost 9 percent above year ago levels.

Including Iraq, which is not bound by the quota, OPEC is churning out close to 30 million barrels a day, or about 35 percent of current global demand.

"We've assessed the market and concluded that there is plentiful supply and the problem is with refining," said Saudi Arabia's Oil Minister Ali al-Naimi (search).

Dealers said the new deal merely legitimizes existing output, leaving a tough test for hard-pressed producers ahead of the fourth quarter, when annual world demand peaks.

"OPEC has been firing blanks for a while," said Glenn Murray, an oil broker based in Monaco. "The fundamental problem is one of refining capacity. Crude per se is not the issue."

"Today's OPEC meeting is a past story, really," said Peter Gignoux, an analyst with New York-based GDP Associates. "At the end of the day, we have a demand issue, not a supply one."

Plagued by pipeline bombings and lack of investment, Iraq's exports are stuck at 1.5 million bpd, he said, less than pre-war capacity. Hopes are pinned on foreign investment contracts that will not be signed until the end of 2006 at the earliest.

OPEC member Venezuela's output has failed to recover fully from an anti-government strike over two years ago and has deterred foreign investors by raising tax rates.

Russia, the biggest exporter outside OPEC, has seen output growth slow sharply this year after the Kremlin cracked down on production company YUKOS (search) in a bid to regain political control over the Russian oil sector.

Saudi Arabia is the only producer sitting on spare volumes. But Naimi said Riyadh could not force-feed a market already sated with crude, blaming a shortage of refined product capacity for bolstering prices.

"We will put more new oil on the market when the demand emerges. Price has nothing to do with it," said Naimi.

The fourth quarter looks set to test OPEC and refiners to the limit. OPEC supplies about 40 percent of world demand that is expected to hit 86.4 million bpd in the fourth quarter from a seasonal low of 82.5 million in the second quarter.

Kamel al Harami, an oil analyst from Kuwait, contended that OPEC is helpless to cool prices. Even if the group adds half a million barrels a day, the oil will be of inferior quality, Al Harami said.

"The situation is out of its hands," he said, predicting prices will remain at their current level.

Reuters and the Associated Press contributed to this report.