With political tensions in Egypt roiling global crude markets, OPEC producers are unwilling to boost supplies until bulging global inventories are reduced, a tough stance that will provide little relief from prices that have hit two-year highs.
The Organization of Petroleum Exporting Countries has already increased production marginally - mainly from Iraq - but a former official of Saudi Arabia's state-owned oil company Saudi Aramco, says the cartel is reluctant to responding too aggressively to higher prices fearing more production would swell already bulging inventories.
Oil markets on Thursday were trying to digest conflicting signals from Eqypt about the fate of President Hosni Mubarak, who announced he intends to stay on as President until an election in September. They also contended with a brief flurry of rumours that Saudi Arabia's King Abdullah bin Abdul-Aziz had died, and a growing dispute over supply between OPEC and the International Energy Agency, which represents industrialized countries over the state of oil markets.
"OPEC's position is that current prices are not driven by oil market fundamentals," Sadad al-Husseini, a former executive vice-president of Saudi Aramco, said in a webcast on Thursday. "It's not driven by a shortage of supply."
He said higher prices are being driven by overly bullish estimates of future demand growth, commodity market speculation, a weaker dollar and the fresh upheaval in Egypt that is threatening the Suez Canal and other oil producing countries.
"There is a great deal of evidence that demand itself hasn't really surged. So there is a reluctance to go out and spend hard cash and hard money on [adding]major increments."
The IEA has warned that prices could continue to rise without more production from OPEC. In a report on Thursday, the agency said there may be enough supply to prevent further price hikes, but not enough to offer any relief.
After volatile trading on Thursday, West Texas Intermediate settled at $86.73 (U.S.) per barrel, up just two cents after careening between a high of $88.28 and a low of $85.96. In London, North Sea Brent fell 88 cents to $101.82 (U.S.) a barrel.
Mr. al-Husseini participated in the webcast following the release of WikiLeaks documents in which U.S. embassy officials quoted him as suggesting the Saudis had "overstated" the ability to boost oil output. The 2007 memo quoted him as saying the Saudis were overstating the reserves, were unlikely to meet ambitious expansion of capacity and would see production begin to decline by 2020.
On Thursday, Mr. al-Husseini sought to clarify those comments, saying he was merely distinguishing between proven reserves and the broader category of "resources in the ground," and that he proved to be wrong in his pessimism about Aramco's ability to increase production.
Since 2007, Saudi Arabia has brought several major projects on stream that have increased its productive capacity to 12.5 million barrels of oil per day from 10 million barrels. It is now producing 8.5 million barrels a day, and represents virtually all of the world's capacity to respond quickly to rising demand.
In a statement on Thursday, OPEC insisted the world remains well-supplied with oil, despite the price increases of the past several months that peaked when the international benchmark crude topped $103 (U.S.) a barrel last week.
The producers' group offered a sharply different picture of oil markets from the view of the IEA, which represents consuming countries. The Paris-based agency has warned that a failure of OPEC to crank up production would cause prices to escalate further, throwing the global recovery in jeopardy.
On Thursday, OPEC said it expects demand to hit 87.32 million barrel per day by the end of 2011 - nearly two million less than the IEA's forecast. The more bearish OPEC outlook means the cartel is less likely to increase its production quotas, which have contributed to higher global crude prices.
For its part, the IEA again raised its demand forecasts in a report Thursday. But it also said OPEC production had reached a two-year high of 29.85 million barrels per day in January as a result of growing contributions from a rebuilding Iraq.
The cushion of bulging inventories and OPEC's spare capacity should "provide some potential to constrain further price increases in 2011," the IEA said in its monthly oil markets report. "That is just as well, given the potentially damaging short term economic impacts were prices to continue to rise."Report Typo/Error