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OPEC barks, but it's losing its bite
Series of output hikes haven't cooled crude. Is the cartel in danger of becoming irrelevant?
June 15, 2005: 5:00 PM EDT
By Katie Benner, CNN/Money staff writer

NEW YORK (CNN/Money) - Time to get nostalgic for OPEC?

The cartel's former might seems to be going the way of spaghetti westerns and lava lamps, to the soft strains of, maybe, "Stairway to Heaven."

Think 1970s. That was when the world oil markets moved when a top OPEC official sneezed. But these days, severe limits on refining capacity, demand too strong for any single group of suppliers to meet, and the specter of terrorism all may be making OPEC irrelevant -- at least as far as world oil markets go.

The Organization of Petroleum Exporting Countries lifted output limits Wednesday to 28 million barrels a day from 27.5 million as of July 1. The move was an attempt to push oil below $50 a barrel since prices above that level could end up slowing world economic growth.

Even so, the U.S. light crude contract for July hit $56.75 in New York Mercantile Exchange trading, not far from the record trading high of $58.28 the nearby futures contract hit on April 4. (Click here for more on Wednesday's oil market.)

Click here for oil prices

"This really shows how OPEC has lost control over this market," said Phil Flynn, an oil analyst with Alaron Trading. "In the old days, the market would have topped after this decision," said Flynn. "But these statements remind the world that the once-great OPEC cartel is powerless to stop rising prices."

Another 500,000 barrel-a-day increase is on tap if prices stay high, said OPEC President Sheikh Ahmad al-Fahd al-Sabah. Traders saw that as insignificant -- given that the group has been unofficially pumping above that level since May.

The 10 members included in the output quota are already producing about 28 million barrels a day. Including Iraq -- which is not bound by the quota -- OPEC's production was 29.3 million barrels daily last month, according to the International Energy Agency, a global energy group. This production level is close to a 25-year-high.

Refining and demand

OPEC officials have continually tried to reassure policy-makers and investors that there's enough supply, and Saudi Arabia's Oil Minister Ali al-Naimi said a lack of refining capacity is the reason for continued high prices.

Analysts agree that OPEC officials can place some of the blame on the rest of the world for not adding refining capacity necessary to keep up with demand. For example, the United States has not built refineries in over 30 years, said Michael Darda, chief economist at MKM Partners.

But by and large, few see adding refining capacity as the key to lower oil prices.

"It's patently obvious that the Saudis, as the world's largest producer, could lead prices lower by offering lower prices," said Jan Stuart, an oil analyst at Fimat USA.

OPEC's Al-Sabah also said that heavy oil demand in China is a major factor behind $55-a-barrel oil, adding that he planned to visit Beijing in September.

Alaron's Flynn said the specter of unrestrained consumption is one of the factors that have taken the bite out of OPEC's bark, pointing to Wednesday's weekly oil inventory report from the Energy Information Administration.

According to the EIA, demand for gasoline over the last four weeks is up 3 percent over the same period last year; and distillate fuel demand is up 6.5 percent above the same period last year.

"It doesn't matter what moves OPEC makes as long as demand is growing like this," said Flynn. "There will come a point when no matter how much those countries produce, there won't be extra ... and they lack the spare capacity as it is."

OPEC supplies about 40 percent of the world's oil needs -- forecast to hit 86.4 million barrels a day in the fourth quarter, according to consultants PIRA Energy.

"What's scary is that we're just moving out of the lowest period of demand for the year and OPEC at full stretch was unable to keep prices down," PIRA's Gary Ross told Reuters.

Fear factor

MKM's Darda said an "armageddon premium" is largely responsible for current oil prices, given that market fundamentals don't support $55-a-barrel oil.

"Everything changed after 9-11," said Darda. "There is a panic premium in prices today, driven by perceptions that supply and production are centered in countries that could fall into political turmoil."

No end was seen for this premium, and it is something OPEC would be powerless to control.

Given that the United States, the world's biggest energy consuming nation, has shown an ability to grow in spite of high oil prices, it may take even longer for prices to ease to levels supported by market fundamentals.

But Fimat USA's Stuart argued that OPEC still moves oil prices, even if its influence is not as clear as it was during the 1970s energy crisis.

Stuart said the market reacted to OPEC's announcement by interpreting what was said Wednesday and using it to find a price floor, which traders see at around $50.

"Now we're just looking for the ceiling," Stuart said.

Where are all the oil profits going? Click here.

Read our special report -- "Oil Crunch 2005."  Top of page

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