Oil Falls But OPEC Output Boost Raises Questions

Updated from 11:15 a.m. EDT

Oil prices fell Thursday, closing below $40 a barrel for the second day in a row, with traders divided over the impact of the Organization of Petroleum Exporting Countries' decision to increase its official production ceiling.

The benchmark U.S. crude dropped 68 cents, or 1.8%, to close at $39.28, after falling about 5.5% Wednesday ahead of the group's meeting today in Beirut. Gasoline futures dropped 4.7 cents, or 3.7%, to close at $1.225 a gallon.

OPEC members agreed to raise the cartel's daily production of 23.5 million barrels a day by 2 million barrels and also announced it would meet on July 21 to consider raising production by an additional 500,000 barrels a day in August.

Most analysts consider the decision largely symbolic, since the cartel's actual production is generally thought to be at least 25.8 million barrels a day.

"Basically, they're already producing around 26 million barrels a day, so they didn't really do anything, did they?" said Sara Emerson, an energy economist and managing director at Energy Security Analysis, near Boston.

But at least one trader said the OPEC pledge will likely continue the cartel's tradition of producing more than it says it is pumping, and the market reacted to the very real possibility of the unspoken but commonly acknowledged practice..

"I'm in the minority, but I actually think we'll see real oil production go 800,000 to 1 million barrels above what we see now, and that's real oil, not just OPEC talk" said Phil Flynn, head Trader at Alaron Trading in Chicago. "Some of the traders are starting to see that."

Although there were reported divisions among the cartel's 11 members, Flynn said once the decision was made, OPEC members will follow through and meet high global demand.