If the measure of success of the annual meeting of oil exporting countries in Vienna was a fall in the oil price, then it can certainly be hailed a success - for now.
Within hours of news that a deal to sanction an increase in output had been hammered out in the small hours of yesterday morning, the price of crude fell 4 per cent. But analysts warned the relief could be short-lived. The price of a barrel of Brent - the world benchmark for oil - dropped below the important $25 mark for the first time in two months. Crude fell 96c or 3.8 per cent to $24.55, its lowest since January 11.
Nine of the 11 members of the Organisation of Petroleum Exporting Countries (Opec) agreed to release an extra 1.45 million barrels a day, an increase of 6 per cent. In effect, that reverses cuts that Opec imposed in late 1998 when Brent was selling for about $9. The cuts have caused oil to surge to levels above $31 not seen since the Gulf War in 1991, sending alarm bells ringing throughout the Western industrialised world of a repeat of the oil price shocks of 1973 and 1979.
Yesterday's increase in production amounts to less than 2 per cent of total daily output of 79 million barrels. It is also much less than the 2.3 million barrels that the International Energy Agency, the West's oil watchdog, said was needed to alleviate shortages of oil stocks.
Yesterday the agency gave the deal a cautious welcome, hailing it as a "step in the right direction". Robert Priddle, its executive director, said: "The increase will not fully meet the increased demand we foresee later in the year, and it will not bring stocks up even to last year's low levels."
Analysts said the Opec deal merely brought oil supply into line with demand, meaning prices would, at best, stabilise at $25, and could rise again. This will suit the producers, who want to maximise revenues and are anxious not to see prices fall further.
Charles Dumas, international economist at Lombard Street Research, said the extra output would meet demand during the typically quiet second quarter of the year.
But he said that the test would come with the start of the "driving season" in the United States - when millions of Americans take to the roads for their summer holidays.Reuse content