A hike in OPEC's output quota is unlikely to bring down high oil prices unless it is a real increase in actual supply above current production levels that changes the fundamentals in the market, analysts said ahead of the group's meeting Wednesday.
A hike in OPEC's output quota is unlikely to bring down high oil prices
unless it is a real increase in actual supply above current production levels
that changes the fundamentals in the market, analysts said ahead of the group's
meeting Wednesday.
Last week, analysts mostly expected the Organization of Petroleum Exporting
Countries to keep its current output ceiling unchanged at its gathering in
Vienna
. But
this week Saudi oil officials, backed by Gulf producers such as Kuwait and the
UAE, have been pressing for an increase of up to 1.5 million barrels a day,
despite resistance from Iran and Iraq.
If agreed, it would be OPEC's first increase of its ceiling since 2008. But it
would mean the group is only legitimizing the 1.5 million barrels a day
estimated excess output already in the market.
"As long as they just officialize the current over-production, the market
reaction won't be huge," said Olivier Jakob, managing director of Swiss
consultancy Petromatrix.
However, the fact that OPEC members are even discussing an increase in the
ceiling has put a lid on prices for now.
"At least they [OPEC members] seem a little more active than one would
have expected and I think this is a signal that they don't want prices to run
away to the upside too much," said Jakob.
A surprise move to increase production above current levels on the other hand
could provoke a steep fall in prices.
"Initially we could have a correction of $2 to $3 [a barrel]," said
Myrto Sokou, research analyst at Sucden Financial.
In the long run, prices could well return to around $90 a barrel, helped by
poor data on oil demand from the
U.S.
and a
slowdown in
China
, she
added.
OPEC has another other option: to do nothing and roll over the current output
ceiling.
But a rollover could spark speculation over the group's spare production
capacity. Such speculation would ultimately do little to control runaway
prices, as it raises fears the group wouldn't be able to compensate for any
supply disruptions.
"It's raised concerns in the market that OPEC has been so inactive. They
need to reassure the market that they are ready to act," said Amrita Sen,
oil analyst at Barclays Capital, referring to the group's lack of action since
2008.
Failure to do this could well result in higher prices in the long run, analysts
said.
At 1333 GMT, the front-month July Brent contract on
London
's ICE
futures exchange was up $1.06 cents, or 0.9%, at $115.54 a barrel. The
front-month July contract on the New York Mercantile Exchange was trading down
29 cents or 0.3%, at $98.71 per barrel.
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