OPEC Raises Quota Ceiling to 27.2 Million b/d

VIENNA Sep 11, 2007 (Dow Jones Newswires)

Moving to meet rising energy demand and ease concerns about record high oil prices, OPEC agreed Tuesday to a new production ceiling of 27.2 million barrels a day, that includes 500,000 barrels a day of fresh oil on the market, the first increase in over two years.

The decision, announced by ministers from Algeria and Qatar, effectively recognizes unofficial increases in production by OPEC members this year, bringing that back within the cartel's official quota system as it prepares to meet potential higher demand this winter.

OPEC's move essentially reverses a pair of output cuts agreed late last year that cumulatively took about 1 million barrels a day off global markets.

The decision to add fresh barrels of oil - however modest - is a surprise for oil markets which have been pushing benchmark crude futures towards record territory.

Kuwait's acting Oil Minister Mohammad Al-Olaim said the move reflected OPEC's shared concern with energy consumers over prices: "We think that the market (price) is little bit high. So we're supporting sustained economic (growth)," he said, adding it shared consumer worries about the global economy.

OPEC President Mohamed Al Hamli said the 500,000 barrels actual output increase will be spread among the OPEC-10 countries subject to quotas on the same basis as the 500,000 barrels production cut was after a meeting in Abuja, Nigeria last year.

Analysts view the decision as a recognition of rising oil demand growth in the face of a potentially chilly winter in the U.S., Europe and Asia. It's also a nod to concerns about the potential damage high oil prices could do to economic growth amid considerable fears about the fallout on U.S. consumer spending from a correction in the housing market.

Going into this meeting, most analysts expected OPEC to hold their current official production levels unchanged, as they seek to gauge the fallout on the U.S. economy from turmoil in the credit markets. OPEC ministers stressed there is ample oil in global markets, arguing that refinery bottlenecks, political risk factors and supply disruptions are responsible for pushing benchmark crude futures towards record levels near $78 a barrel.

But analysts say the cartel, particularly Saudi Arabia, is acting now to see off a price move above $80 a barrel in the fourth quarter that could potentially eat into peak energy demand.

"With prices so high, the Saudis may now be more willing to take the risk, in their eyes, of an increase in oil production," said Simon Wardell, an analyst at Global Insight in London. He said the U.S. subprime mortgage crisis may have crystallized the issue for Saudi Arabia.

Saudi Arabia's powerful oil minister Ali Naimi didn't comment publicly at this meeting.

OPEC Secretary General Abdalla Salem el-Badri said: "Our message to the consumer is that we care and we are concerned and that is why we increased production."

Algeria's Oil Minister Chakib Khelil said it was too early to gauge demand in the deep winter, and that the group's December meeting in Abu Dhabi "is too far away".

He added that the move still left OPEC with "plenty of (spare) capacity of 1.5 million barrels a day."

The OPEC decision came as oil prices flirted with record levels north of $78 a barrel and the market's initial reaction suggests the modest amount of extra oil - equivalent from about 2% from current actual production - may struggle to deflate some of the bullish market momentum.

Benchmark crude oil futures in New York were unchanged after the OPEC decision, down six cents at $77.43 after a choppy trading session.

Brian Hicks, fund manager at U.S. Global Investors Global Resources Fund, said the increase "is not enough to change the tightness in the market going into the fourth quarter."

Copyright (c) 2007 Dow Jones & Company, Inc.

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