Opec confuses oil market with rise in output quotas

Attempts BY the major oil exporting nations to stem a fall in prices appeared to backfire yesterday after Opec sent a confused message with its latest ruling on output quotas.

Prices on the world markets tumbled after the cartel, the Organisation of Petroleum Exporting Countries, surprised observers by raising the overall limit on production.

The move, in effect, legitimises a large portion of the extra supply pumped out in the run up to the war in Iraq amid fears of a price spike.

The oil cartel agreed to lift official output limits by 900,000 barrels a day to 25.4 million – almost identical to the 25.5 million barrels pumped every a day during February and March.

Ministers tried to justify the decision on the basis that the markets would be deprived of the 1.9 million barrels a day that Iraq had pumped out before the outbreak of hostilities.

They claimed that the effect of their decision was to cut supply by 2 million barrels a day – the volume that had been anticipated by the markets.

Oil prices slid in afternoon trade on concern that the agreement would not lead to a cut in supplies. In New York, light crude prices fell $1.04 to $25.61 a barrel, a five-month low. In London Brent was 66 cents lower at $23.60.

The Saudi Oil Minister Ali al-Naimi said a further reduction at Opec's next meeting on 11 June in Doha, Qatar, was "very, very possible".

"This is a highly confusing decision and it sends a very confusing message to the market," Raad Alkadiri of the Petroleum Finance Corporation in Washington said.

"It looks like they have precluded any return of Iraq oil before June, and are, in effect, sharing Iraq's market share between them."

Nauman Barakat, a broker at Fimat International Banque in London, said: "This is all smoke and mirrors. Saudi Arabia appears to be grabbing a higher quota before the return of Iraq."

The price falls followed a 5 per cent drop on Wednesday when it emerged that record import volumes had boosted US crude stocks.

Western governments will welcome cheaper fuel costs, as they will help fuel the nascent economic recovery.

Less than two months ago US oil prices came within a cent of $40 – the levels since during the first Gulf War that was followed by a US recession – but have since tumbled by 35 per cent.

The Organisation for Economic Co-operation and Development, the economic think-tank of the 30 rich nations that include the largest oil consumers, yesterday said the risk of surging world oil prices related to war had now receded.

It said it was assumed oil prices would average $25 dollar a barrel in the next year or more, not far from the level oil was trading at yesterday.

Opec is striving to keep oil prices within a $25 to $28 range, mindful of its mistakes after it let prices fall below $10 a barrel when its mistimed a large expansion in output that coincided with the Asian financial crisis.