Oil Prices Soar to New Highs on OPEC Fears

Updated from 1:41 p.m. EDT

Oil prices soared to new 10-year highs Thursday on growing fears that the Organization of Petroleum Exporting Countries' widely expected hike in production won't be enough to increase oil inventories and reign in prices before the temperature drops.

The benchmark October contract for crude oil traded as high as $35.19 a barrel in overnight trading -- the highest level since the Persian Gulf War. In London, the October Brent crude oil contract set a new 10-year high of $34.60 on Thursday before closing at $34.55.

Crude oil ended the day up 49 cents at $35.39 a barrel on the New York Mercantile Exchange despite an earlier round of profit-taking on reports that Saudi Arabia could increase production an additional 200,000 barrels per day above the half-million-barrel increase suggested under OPEC's price band mechanism.

Under an informal mechanism implemented at their June meeting, OPEC members agreed to raise production by 500,000 barrels a day if the price of oil in its "basket" (which includes blends from Algeria, Indonesia, Saudi Arabia and Venezuela) stayed above $28 a barrel for 20 consecutive business days. So far, it has remained above that level for 18 days, leaving little doubt that the oil cartel will boost production by at least a half-million barrels a day when it meets Sunday.

Market estimates of the projected OPEC increase range from 500,000 barrels a day -- a level most agree will do little to ease prices, or concerns about supplies -- to 1 million barrels a day, which seems an increasingly unlikely possibility based on recent comments from some OPEC officials.

Iranian officials indicated on Wednesday that fundamentals don't justify a production increase beyond 500,000 barrels per day, and brushed aside suggestions of a 1 million-barrel increase.

Analysts say that much of this week's dramatic price action can be attributed to speculation over how much OPEC ministers will raise their production ceiling when they meet this weekend -- and how much more oil that will actually mean. Only three of OPEC's member countries are believed to have enough excess capacity for significant increases in output: Kuwait, the United Arab Emirates and OPEC kingpin Saudi Arabia, the world's largest oil exporter.

But it is unclear whether Saudi Arabia, which has pushed for an increase of a half-million barrels a day since mid-summer without much support from fellow OPEC members, went ahead with a unilateral increase anyway. If the Saudis already boosted production, then an official increase of a half-million barrels by OPEC could do little more than validate the Saudi's decision to produce above its quota.

President Clinton reportedly expressed such concerns in a meeting with Saudi Arabia's Crown Prince Abdullah Thursday. Clinton said he feared that if oil prices remain this high, it could lead to a recession in the U.S. or elsewhere in the world, and added that he has asked the Saudis to help lower crude prices, according to Associated Press reports.

While Saudi Arabia has not publicly acknowledged implementing a unilateral increase in exports, analysts say that recent inventory data indicate that the Saudis may have already boosted production last month by at least 300,000 barrels a day.

Concerns that supplies may fall short in the coming winter were hardly eased by new supply data, which showed only a moderate increase in U.S. crude oil stocks last week, leaving inventories far below last year's levels.

The American Petroleum Institute, an industry group, reported late Wednesday that crude oil stocks rose 3.13 million barrels in the week ending Sept. 1. Even with the additional oil, however, inventories remain 21.8 million barrels below last year's levels. Figures released Wednesday by the Energy Information Administration, the statistical branch of the Department of Energy, showed last week's increase may have been even smaller -- about 2.8 million barrels a day.

Inventories sank to a 24-year low last month, but have since shown moderate increases over the past two weeks.

Meanwhile, the EIA said inventory levels for distillates, which include heating oil and diesel fuel, actually decreased slightly, by about 100,000 barrels. The API reported a small increase of just 658,000 barrels -- leaving levels about 20% lower than a year ago.

It's not unusual to see such a divergence in the two groups' data. But the EIA figures are usually looked upon to confirm the API data, which comes out a day earlier. The drop in distillate stocks reported only heightens fears of further price hikes this winter as demand for heating oil grows.

"If you're a consumer, the concern number is the heating oil -- tight supplies and an apparent inability to build for winter," said Phil Flynn, an analyst at Alaron Trading, in a report Thursday. He added that estimates had actually called for an increase of 2.2 million to 2.6 million barrels.

Still, most of the market has remained focused on crude oil. While supply-and-demand fundamentals do not seem to support a spike in prices to $40, Tyler Dann of Banc of America Securities said his research team does not rule out the possibility.

"It's as if there's a stock market mentality embedded in the oil market," said Dann, an oil analyst. "This market is driven by speculation. It's a crap shoot at this point."

Analysts at London-based GNI said Thursday that the chance that oil prices will reach the Gulf War highs of around $41 a barrel remains a long way off. "But we note that fewer traders are dismissing it as a possibility now, whereas it seemed ludicrous a few weeks ago," the analysts said.

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