Crude price plunges as Opec signalsquota rise

THE OIL price fell sharply yesterday after Opec, the producers' cartel, put member countries on stand-by to raise production by 500,000 barrels a day.

THE OIL price fell sharply yesterday after Opec, the producers' cartel, put member countries on stand-by to raise production by 500,000 barrels a day.

In an official statement, Opec's president Ali Rodriguez said producers should be ready to open the taps if the price did not fall significantly by the end of the month.

The move follows the surprise announcement a fortnight ago by Saudi Arabia, the largest Opec member, that it would add 500,000 to world supply on its own. In London, a barrel of Brent crude for September delivery - an industry benchmark - fell as much as 2.2 per cent or 63 cents to $28.60.

But analysts said Opec's plan was much weaker than the Saudi initiative and would do little in the long run to ease price pressures in the face of a global economic recovery.

In his statement Mr Rodriguez, who is also Venezuela's oil minister, said he had notified his Opec colleagues that they should be ready to take "the necessary steps" to raise output if prices remained at current levels. "Other things being equal, it is expected that this will happen before the end of the current month," he said.

If the increase does come, Opec said it would be shared out between the 10 members who take part in the quota system, ranging from 162,000 for Saudi Arabia to 13,000 for Qatar.

Lawrence Eagles, an analyst with brokers GNI, said the Saudi plan had been "watered down" by Opec. "Saudi Arabia has not managed to do anything. It has raised the discussion but it is not a Saudi victory by any means. If anything, the others have ganged up on Saudi Arabia."

Mr Eagles said Opec had given itself a get-out clause by insisting that its index of oil prices should remain above $28 for 20 working days from 1 July before it increased output. "The price has already fallen and if it goes below $28 then the 20-day period has to start all over again," he said.

Charles Dumas, director of Lombard Street Research, said only Saudi Arabia, Kuwait and the United Arab Emirates had spare capacity. "Until Opec capacity is perceptibly increased, there will be upward pressure on oil to about $30 a barrel unless the US economy slows down - and we see no sign of that," he said.

US inflation figures out today are expected to show a further sharp rise in June - to 0.5 from 0.1 per cent - on the back of the recent rise in the oil price. "My sense is that the upward pressure on oil prices won't be relaxed until Alan Greenspan [the chairman of the US Federal Reserve] has made one or two more substantial moves [in rates]," Mr Dumas said.

Meanwhile the European Central Bank last week warned that rising oil prices, combined with a weak euro that makes imports more costly, was a threat to its inflation target.

If Opec does raise output it will be the third such increase this year. The cartel raised production by 1.7 million barrels a day in March and by another 708,000 last month on the 75 million barrel a day world market. The moves represented a relaxation of a quota system that Opec set up in 1998 after oil fell below $10.

Opec insiders and oil company officials say Saudi Arabia is already leaking extra crude to the market and is likely to be pumping beyond its new quota this month. It also has already promised customers in the US and Asia more crude for August.

"We still believe the Saudis are prepared to do more - even the full 500,000 barrels a day," said an executive at a Western company that buys Saudi crude.