Oil Eases at $32.81 on Expectations of a Tuesday OPEC Production Increase - TheStreet

After spiking up above $33 early in the day, oil prices began to ease Monday on growing expectations that the

Organization of Petroleum Exporting Countries

would implement a production increase on Tuesday.

Initially, OPEC confirmed Monday that its president, Ali Rodriguez, had appealed to the group's members, excluding Iraq, to raise output by 500,000 barrels a day on Tuesday. The action is in line with an informal agreement made among members earlier this year to increase production if the price of its basket of crude oil blends (including blends from Algeria, Indonesia, Nigeria and Venezuela) remained above $28 a barrel for 20 consecutive working days. The mechanism was set off Friday, the 20th day in which the basket price remained above that price range.

Later Monday, there were reports that an OPEC governor, Hossein Kazempour Arbedeli of Iran, had confirmed that the organization had approved the increase, with his country's share amounting to about 73,000 more barrels a day. Though analysts questioned whether Iran had the capacity to follow through with the increase, the report helped prices reverse course Monday afternoon.

The contract for December delivery of crude oil climbed as high as $33.40 a barrel, a gain of 66 cents. But, by late afternoon, it finished up just 7 cents at $32.81 a barrel on the

New York Mercantile Exchange

.

How Much More Can OPEC Produce?

There are concerns about how much OPEC is capable of increasing its oil exports, as most industry and government analysts agree that Saudi Arabia and the United Arab Emirates are the only OPEC members with any significant excess capacity at this time. Saudi Arabia, the world's largest oil exporter, has indicated on a number of occasions that it was able and willing to increase production to help push down prices. Over the weekend, the UAE appeared ready to implement a production increase as well.

By Monday, Qatar seemed to be the last remaining dissenter among OPEC members, excluding Iraq, according to London-based

GNI Limited

. Qatar's oil minister was reported as saying that the current surge in oil prices is the result of "psychological factors" and seemed reluctant to implement the price band mechanism under what it did not consider to be normal market conditions.

According to the

Energy Information Administration

, a division of the

U.S. Department of Energy

, Qatar is only capable of producing 80,000 more barrels of oil per day or less.

Erik Kreil, international energy analyst at the Energy Information Administration, said he expects almost all of the proposed production increase will come from Saudi Arabia. His agency had anticipated such an increase since Saudi Arabia indicated in the summer that it would be willing to raise oil production, even unilaterally, to help ease global oil prices.

"We believe that they were sincere when they said they'd do whatever it takes," Kreil said. "The price band mechanism is just a validation is what they were going to do anyway."

Earlier this month, the EIA released a report projecting that production among OPEC's 10 members (excluding Iraq, which is constrained by United Nations sanctions) would reach nearly 26.8 million barrels daily in the fourth quarter -- about 600,000 barrels a day above the quota increase that went into effect on Oct.1. That leaves the world's surplus oil capacity at its lowest level in three decades, excluding periods of disruption.

Though the implementation of the price band mechanism would be a temporary solution to help keep prices within the $22 to $28 barrel range (as measured through OPEC's basket of crude blends), Kreil said the organization would likely keep production up through the end of the year, when the EIA estimates oil prices could finally fall back below $30 a barrel.

But Bill Randol, oil analyst at

Banc of America Securities

, is more skeptical that OPEC will follow through with the proposed increase. He dismissed the proposal as "lip service" and added that the OPEC members had neither the intention nor the capability to go through with the full half-million barrel daily increase. His firm does not expect OPEC's members to increase production by more than 200,000 barrels incrementally.

Over 30

Randol said the three factors keeping oil prices above $30 a barrel remain firmly in place: tight inventories, limited short-term potential for new supply and robust demand worldwide. "Our $30 per barrel forecast for the fourth quarter already appears obsolete and too low," he added.

On Oct. 9,

Banc of America Securities

raised its fourth-quarter estimate to $30 a barrel and its oil price forecast for 2001 to $27 a barrel, up $3 a barrel from its previous estimate.

Randol said the general tightness in the market has made the world particularly vulnerable to outside factors that could affect the supply of oil. The price of oil immediately jumped, for example, after Iraq threatened last

Thursday to cut its oil exports if it were not paid in euros instead of dollars, even after the Clinton administration indicated the currency shift would not be a problem.

There have also been concerns raised about the effects of higher oil prices on the U.S. economy, as consumers face higher gas prices and heating bills and companies blame higher energy costs for cutting into their third- and fourth-quarter profits.

But Carl Weinberg, chief economist at

High Frequency Economics

, said even if oil prices remain in the low $30s-a-barrel range, the worst may be over, as the economy has already begun adjusting for the rate of change in oil prices. He expects the situation to improve over the next six months.