OPEC set to lift output

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OPEC is poised to approve a plan for a Saudi Arabia-led increase in oil production to end shortages caused by a strike in Venezuela and to lower prices from around US$30 a barrel, analysts said.

OPEC probably will add between 1 million and 1.5 million barrels a day to its output quota of 23 million to get prices back to its target of US$22 to US$28, analysts said. That move won't fill the loss of 2.3 million barrels a day from Venezuela.

Just a month after agreeing to cut supply, the Organization of Petroleum Exporting Countries is changing course. Concern for Venezuela's crippled oil industry and a possible U.S. war with Iraq sent oil prices up 44 percent in London last year, the second-largest gain of the past two decades.

"Current prices are seen as a problem, and Saudi Arabia is prepared to throw oil at that problem," said Paul Horsnell, head of energy research at J.P. Morgan Chase & Co. in London, who expects OPEC to raise quotas by 1.2 million barrels. OPEC holds almost 80 percent of oil reserves and pumps only a third of global supply.

Tomorrow's meeting will be OPEC's second in a month. In phone calls between the group's representatives, Saudi Arabia, the world's largest producer, failed to convince other members to agree to boost quotas by 1.5 million to 2 million barrels a day.

Oil importers from the U.S. to India, Asia's fourth-largest consumer, are lobbying OPEC to pump more oil. Rising energy prices lead to higher costs for airlines such as AMR Corp.'s American Airlines and increase gasoline and heating bills, which may undermine growth in the world economy.

Concerned rising oil costs may spur development of competing forms of energy, OPEC has agreed to consider increasing output when oil prices stay above the target for 20 consecutive days, based on a benchmark index of seven types of crude oil. OPEC's benchmark price was US$29.51 yesterday, the 17th trading day above the range, meaning the accord may be triggered on January 14.

In Vienna on December 12, the 11-nation OPEC set a two-pronged strategy to curb overproduction and avoid a price decline later this year. To bring members closer to the quota, the group raised the daily output target to 23 million barrels while pledging to cut supplies by as much as 1.7 million barrels a day.

Because members other than Venezuela are cheating on quotas, tomorrow's expected announcement may not result in as much supply as promised. Also, some members, such as Indonesia and Kuwait, already are pumping as much as they can, analysts said.

"It's not going to result in many more barrels than in December," said Lawrence Eagles, head of commodities research at GNI Ltd.

"It will depend on how much more Saudi Arabia is prepared to supply."

OPEC will distribute any production increase on a pro-rata basis, based on members' current quotas, even though Venezuela can't meet its share, said OPEC President Abdullah bin Hamad al- Attiyah, who is also Qatar's oil minister, in New Delhi.

Saudi economist Ihsan Buhulaiga, a member of a council that advises the kingdom's government, said he expects an increase of 1.5 million barrels a day.

"My biggest worry is that an increase of this size could cause a glut and a price crash later in the year," Buhulaiga said. The move "will most likely push prices down to close to US$25 a barrel," he said.