OPEC may increase output to dampen prices

OPEC will probably raise its output ceiling this week in an attempt to rein in near-record oil prices, but refining bottlenecks will continue to drive the market and make any potential hike nothing more than a symbolic gesture.

During the meeting of the Organisation of Petroleum Exporting Countries in Vienna tomorrow, the ministers are likely to agree to a 500,000-barrel-a-day increase, but delegates and analysts say that the market is well supplied with crude and the problem lies with refining products.

Oil Minister Ali Naimi of Saudi Arabia, the OPEC member with the best capacity to increase production, has said he supports a ceiling hike, but that he also did not see demand for more crude. He did not specify the size of the increase.

OPEC’s current output ceiling is 28 million barrels a day.

Prices have been driven higher after Hurricane Katrina slammed into the US Gulf Coast, a major oil production hub. The storm has been blamed for the evacuation of more than 700 offshore platforms and rigs. Several Gulf Coast refineries have shut down or reduced operations.

OPEC President Sheikh Ahmed Fahd Al Ahmed Al Sabah, who is also Kuwait’s oil minister, said the cartel may even need to act again before the end of the year as US refineries hit by Katrina recover and the Northern Hemisphere’s winter sets in.

“I think in November some refineries will come back in the south of the US, and if the winter is cold, we have to do our best to increase real production,” he said.

OPEC was originally expected to make its output decision today, but that has been delayed until tomorrow to accommodate a celebration of 40 years since it moved its headquarters to Vienna, as well as ministerial talks on a new long-term strategy.

Previous OPEC increases have done little to ease market fears over supply, and any increase is widely regarded as meaningless because it merely sanctions existing production.

Venezuelan Oil Minister Rafael Ramirez said his country was not opposed to an increase in OPEC's output ceiling, but said such a move would be largely symbolic.

Ramirez said refining capacity was a “very big problem”, in part because of damage from Katrina.

Libyan Oil Minister Fathi Hamed bin Shatwan said he was against an output hike because “it won’t make any difference”.

“I think the market is very well-supplied now with crude. There is a problem of products and this is not OPEC business,” he said upon arriving in Vienna.

“The oil problem is clearly downstream – insufficient refinery capacity. Already OPEC members find it difficult to find a market for their crude oil, they’re really struggling to place their barrels,” said Johannes Begnini, president and CEO of PVM Oil Associates of Vienna.

“Refinery tightness is going to keep prices high,” he said.

Prices soared above $70 a barrel in the aftermath of Katrina on concerns over production outages, instability in Iraq and the upcoming winter.

But OPEC also risks sharper price declines, as high prices seem to have taken a toll on demand.

Prices hit their lowest levels in five weeks Friday, with light, sweet crude for October closing at $63 on the New York Mercantile Exchange, the lowest level since August 5.