OPEC Eyes Supply Hike

Markets Reuters

OPEC is considering raising crude supply next week for the first time since 2007 in a move that could weaken $100 oil prices and lessen the drag of high energy costs on global economic growth.

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The Organization of the Petroleum Exporting Countries, which pumps more than a third of the world's oil, may raise supply targets by as much as 1.5 million barrels per day (bpd) when ministers meet on June 8, a delegate said on Thursday.

"There is a need for an increase to replace the loss from Libya," the delegate said. "Oil prices are too high. $100 oil is scaring people."

The most likely outcome of the meeting would be for a rise of 1 million bpd, the delegate added.

"That would be calming for prices," the delegate said.

A target rise of 1 million bpd would result in only a small increase in actual oil supply from the group, the delegate said. That was because part of the rise would simply absorb above-target supply that some members of the group in OPEC were already pumping, the delegate added.

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The 11 members of the group bound by OPEC production targets pumped 26.23 million bpd in May, nearly 1.4 million bpd above their 24.84 million bpd target.

Raising formal output targets would force OPEC to confront tough issues aside from overproduction. Top oil exporter Saudi Arabia holds most of the group's spare capacity so is likely produce most of any extra oil supply.

Other members would be reluctant to cede their theoretical share of any supply target increase, even if they are already at full capacity.

OPEC members Iran, Libya and Venezuela could resist any rise in targets, industry publication Energy Intelligence reported on Wednesday, citing an OPEC insider. [ID:nN01216874]

Libya, whose top oil official recently defected amid continued bloodshed there, would not want other OPEC members to officially divide its share of the targets, the delegate said. Civil war has cut its exports.

With so many complications, another delegate saw no need for a formal change and said OPEC members could simply flout official targets to meet demand.

"Why bother?" he said. "Everybody is pumping what they want anyway and getting the money they want and more."

A rise in targets would go against analyst expectations in a Reuters poll for the producer group to leave output unchanged at the meeting. [ID:nLDE7501AO]

Brent crude <LCOc1> fell 38 cents to trade at $114.15 a barrel at 0905 GMT on Thursday. U.S. crude traded just below $100.

Brent has traded above $100 since early February, prompting consuming governments to warn of the impact of high oil prices on economies still fragile after the global financial crisis.

The West's energy watchdog, the International Energy Agency, last month urged producers to boost supplies to help lower fuel costs and protect the economic recovery. [ID:nLDE74H0VC]

Data this week from top oil consumer United States has exacerbated concerns that the recovery in the world's largest economy is running out of steam. U.S. companies hired fewer workers than expected in May and output in manufacturing slowed to its lowest levels since 2009. [ID:nN01147563]

China, the engine of global oil demand growth for more than a decade, is also slowing down. Chinese factories expanded in May at their slowest pace in at least nine months. [ID:nL3E7H103M]

But fuel costs were only part of a wide list of factors impacting economic expansion, the delegate said.

"Some of it is the oil price, but that is not the whole story," the delegate said.

Even if a target increase results in few additional barrels of oil on the market, it could soothe Libyan supply concerns and worries about high fuel costs, JP Morgan oil analyst Lawrence Eagles said.

"This would be a positive policy step as far as consuming countries are concerned," Eagles said.

"Higher output is clearly good news for a global economy that is going through a soft spot," JP Morgan analysts led by Eagles said in a report on Wednesday.

"But it is not clear yet if it is enough to prevent oil prices from moving higher in the third quarter."

Top oil exporter Saudi Arabia boosted oil supply in February to plug the gap left by Libya, where civil war cut output. But it reduced supply again in March, citing a lack of demand. OPEC has taken no formal decision to supply more oil to compensate for Libya's supply disruption or to ease prices.

Saudi Arabia and other Gulf producers are wary of the impact high oil prices might have on the economy and on demand. As recently as February, Saudi Oil Minister Ali al-Naimi had said a price of $70-$80 per barrel was fair to both producers and consumers.

A slightly wider range of $70-$90 per barrel would still be good for both, an OPEC delegate said on Thursday.

Saudi Arabia's oil price needs have risen as it has offered $130 billion in handouts to stave of grievances that could stoke unrest similar to that rocking much of the Arab world. [ID:nLDE72K22T]

OPEC has kept formal supply policy unchanged since late 2008, when the group agreed record cuts to match the sharp fall in demand as the financial crisis engulfed the economy. (Reporting by Simon Webb; Editing by Michael Urquhart)