OPEC is “overproducing”, and oil is still $90 a barrel

Doesn’t look good for future supplies when OPEC members today are going flat out to supply oil, regardless of agreed-upon maximum quotas, which are designed to keep the price high . Everyone wants in on the bonanza.

“Each of us is overproducing, and we all know it,” said one OPEC delegate. Now, does that mean that they’ve all reached maximum production, or does a cushion of surplus capacity to produce exist? Many oil experts at such places as Goldman, Morgan Stanley, and others think oil producers are near their limit of total production. If so, “opening the spigots” means nothing, as there’s no more to pump to help control the rise in prices.

And this is at a time when demand has not reached levels seen in 2008. When, or if, demand does pass that threshold, you know what’s coming. Say it with me: “oil shock.”

So we can hope that the economy stays ragged, in sort of a perma-recession, or we can hope that all the experts are wrong and that much more surplus capacity exists. Remember the basic laws of supply and demand: once price gets to a certain level, then either demand is destroyed, or supply increases in an attempt to take advantage of the higher prices. Both of which have the long-term effect of lowering prices.

But our world has never lived through peak oil before. Peak oil means that supply increases will not be the route to lower prices. That leaves demand destruction via high prices as the route to lower prices. In this case, our economy will be fundamentally and permanently altered, as we’ve used increased demand for oil as the means to growth. This is all new territory.

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As Prices Rise, Questions on Opening OPEC Spigots

by Benoit Faucon

As OPEC prepares to meet again this week in Ecuador, some oil-market watchers are pointing to the latest gains in prices to raise an important question for the group: When will the time be right to open the spigots again?

Oil prices on Tuesday broke the psychologically important level of $90 a barrel on the New York Mercantile Exchange before retreating on Wednesday.

Prices have benefited from a severely cold winter in the Northern Hemisphere, a somewhat improved economic outlook and bullish forecasts in recent days from Goldman Sachs and other banks for higher oil prices for 2011.

While nobody expects the Organization of Petroleum Exporting Countries to announce any bombshells at the Saturday meeting, the tone of the Quito gathering could foreshadow a debate that will become more prominent in 2011.

“The price of oil is going up” because of market-tightness concerns, said John Hall, chairman of U.K. energy consultancy Energy Quote. “OPEC needs to act decisively.”

Mr. Hall believes OPEC should boost its output ceiling and formally decide that its 11 quota-bound members can pump more oil. OPEC members are already producing well above their quotas, but an increase in its production ceiling would send a clear message to markets that OPEC is concerned about runaway prices damping the economic recovery.

Also concerned is the International Energy Agency, which has been sharpening its rhetoric in recent months as prices have risen. The IEA represents some of the world’s largest energy consumers.

“If prices go well above $100 a barrel, that would kill the recovery,” Eduardo Lopez, a senior oil-demand analyst at the IEA, said in a recent interview.

But members of OPEC, which supply about 40% of the roughly 87 million barrels of oil consumed globally each day, have repeatedly said that markets shouldn’t expect a change from the status quo in Ecuador.

OPEC hasn’t formally changed its quota system since instituting a major reduction in output in late 2008 after the financial crisis.

“I don’t think much will happen in Quito,” said Shokri Ghanem, Libya’s top oil official, last week, echoing a commonly held view.

Since OPEC last met in October in Vienna, oil prices have lingered around $85 a barrel—above the range OPEC previously indicated strikes the right balance between the need of consumers and producers and won’t hurt the economy. However, the influential Saudi oil minister Ali Naimi recently said some producers see the acceptable range as $70-$90 a barrel. Oil for January delivery closed down 41 cents per barrel at $88.28 on Wednesday, after trading above $90 on Tuesday.

On Wednesday, OPEC President Wilson Pastor told Dow Jones that a reasonable price for oil is between $75 to $85 a barrel, below the current Nymex futures price. However, he said he “didn’t believe” an early meeting to address rising prices will be necessary between now and the next scheduled session in June.

Several banks last week significantly boosted their expectations for the price of a barrel of oil, with some seeing it averaging $100 next year and reaching $120 by the end of 2012. Noting that world oil demand came “roaring back” in 2010, Goldman Sachs projected 2011 average prices of $100 a barrel on the strength of “sustainable” petroleum-demand growth.

While most observers expect more talk about high prices from OPEC members this week, they see little impetus for a change in OPEC strategy. For one thing, many OPEC members blame higher prices on other factors, such as financial speculation or dollar weakness. As a result, some group members are skeptical about whether a formal increase in quotas could interrupt a new price spike.

Members are also unlikely to implement an output increase because there is uncertainty over how much additional crude supply will come to market from producers outside the group, said Muhammad Ali Khatibi, Iran’s OPEC governor.

The group expects non-OPEC supply in oil, natural-gas liquids, biofuels and other unconventional products will increase by 2.2 million barrels a day over the 2009-2014 period. The increase is driven by Russia, Kazakhstan, Brazil and the U.S. Gulf of Mexico.

“The stability of the market is not 100% in the hands of OPEC,” Mr. Khatibi said.

But the biggest factor is that members see little need to act aggressively to contain prices absent a more dramatic spike that leads to greater attention in political and economic spheres.

Compliance with agreed-on cuts stood at 52% in November, according to a Dow Jones survey, compared with about 80% in early 2009. Many OPEC members believe there is no need to formally change quotas because members have already increased their production. “Each of us is overproducing, and we all know it,” said one OPEC delegate

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