Oil prices fell sharply in London yesterday after OPEC agreed to boost output from April 1st, but analysts questioned whether the increase would meet demand. Benchmark Brent crude for May delivery was trading at $24.42 (€25.68) in London, having opened at $25.24. It was the first time the price had fallen below $25 since mid-January. In New York, light sweet crude for May delivery traded at $26.38 a barrel, compared to $27.09 on Tuesday.
"The initial market reaction is not surprising. We have to see how it develops. But the prices should not collapse, because the world demand is still very healthy," said London-based analyst Mr Mehdi Varzi from Dresdner Kleinwort Benson.
International Energy Agency executive director Mr Robert Priddle warned that while the production increase was "a step in the right direction", it "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".
Nine of the Organisation of Petroleum Exporting Countries' 11 members agreed at a meeting in Vienna to restore output to its level a year ago, before an agreement to cut output by 1.7 million barrels per day (bpd). Iran said it could not support the deal because of its "political" nature - the US had been pressuring OPEC to raise output to deflate prices from 10-year highs of more than $30 a barrel.
This meant the agreement covered an increase in output of 1.452 million bpd, but then Iranian Oil Minister Mr Bijan Namdar Zanganeh said Tehran would also boost output from April 1st to preserve its own interests. He gave no figure, but analysts believed Iran would also return to its output levels before the March 1999 agreement.
The 11th OPEC member, Iraq, is not covered by the cartel's quota system because its oil sales are limited by UN sanctions in place since its 1990 invasion of Kuwait. It was not immediately clear how much new oil was expected, not only because of Iran's position, but also because of questions over the degree of compliance with the new quotas.
The existing quota agreement had until recently enjoyed a high degree of compliance, contributing to the tripling of prices, but OPEC members have a history of quota-busting. The statement issued by the nine in Vienna late on Tuesday night "emphasised their firm commitment" to the agreement and their "intention to ensure full compliance".
The Centre for Global Energy Studies in London said that since OPEC was already over-producing by at least one million bpd, the increase in output would be only around 700,000 bpd.
The decision to boost output was hailed by President Clinton as a "positive development" which would "help sustain worldwide economic growth and provide greater balance between oil supply and demand".
And US Energy Secretary Mr Bill Richardson acknowledged that although there was no US representative at the OPEC meeting, the US had applied forceful diplomacy and he had been "working the phones" during the talks to try to win an increase in output. Mr Richardson estimated that the real increase in production would be close to 2.8 million bpd and forecast an oil price of about $24 a barrel at the end of the year.
