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Oil price out of OPEC's reach

Despite an expected production increase later this week, OPEC may not be able to pump enough oil to bring down prices that have been skyrocketing due to instability in the Middle East and increased world demand.

Analysts said record high oil prices of some US$40 a barrel may be driven by geopolitics and other global factors that are far beyond the reach of the Organization of Petroleum Exporting Countries, an 11-nation cartel that produces about a third of the world's oil and is already producing close to capacity.

OPEC president Purnomo Yusgiantoro said last week he was confident the cartel's ministers would agree to increase OPEC's oil production ceiling in an attempt to curb soaring world prices when they meet in Amsterdam on Friday.

Yusgiantoro said the ministers would discuss Saudi Arabia's proposal to raise output by 1.5 million barrels per day (bpd).

But analysts said OPEC was already overproducing and can do little more to push down prices.

Bruce Evers of Investec Securities said in London that OPEC production of some 2 million bpd over its official quota of 23.5 million bpd should already have lowered prices.

"But it did not happen because of extreme tensions in the Middle East and other producing countries ... and because demand is much stronger than people think," Evers noted.

"More oil in the market doesn't necessarily bring prices down," Deutsche Bank analyst Adam Sieminski said by phone from London. He said the real effect of an OPEC quota increase would be to add half a million bpd to the world market.

"The next move in oil prices depends at least as much on geopolitical factors as on how much oil is in the market," he said, pointing to concerns by oil traders about further stability in the Middle East, where even the world's largest oil producer Saudi Arabia is now threatened by terrorism.

Meanhwile, OPEC member Venezuela is having trouble increasing production "because of underspending" by its government and Nigeria is wracked by ethnic violence, Sieminski said.

In addition, demand for oil has grown despite warmer weather in the northern hemisphere as economies recover in the US and Japan and are booming in China.

"Japanese nuclear power plants are shut down because of problems they had a year ago," Sieminski said, noting that this meant Japan needed more oil.

Another key factor is tight gasoline supplies in the US as the warm weather driving season begins. High US gasoline prices "can help keep crude prices up" but are affected by more than the crude oil supply.

These prices have to do with shortages created by "refinery issues and incredibly complex gasoline rules" from the Environmental Protection Agency, Sieminski said.

He added that he did not think oil prices were sustainable at current high levels in the long-term but that in the short-term they were not likely to come down and could even spike to US$50 a barrel.

Concerns over supply were heightened after gunmen attacked a Saudi oil facility on May 1 at Yanbu port, killing five employees of the Swiss-Swedish engineering group ABB and a Saudi national guard soldier.
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