Saudi Arabia persuaded OPEC to raise oil output by 500,000 barrels per day on Tuesday in a gesture to consumer nations worried by the economic impact of $77 oil and rapidly diminishing fuel stocks.
After seven hours of talks, OPEC officials announced the hard-won deal, effective November 1. Before the meeting Libya, Algeria and Venezuela were inclined to resist the proposal put forward by Saudi Arabia and its Gulf Arab neighbors.
We think the market is a little bit tight so we are responding positively. We are also taking into consideration, as OPEC, the concern of the consumers, acting Kuwaiti Oil Minister Mohammad al-Olaim told reporters.
Our message to the consumer is that we care and that is why we have raised our production by 500,000 bpd, OPEC Secretary-General Abdullah al-Badri told a news conference.
U.S. crude oil was down seven cents at $77.42 after the deal but still within sight of its record high of $78.77 a barrel.
Given the global credit crunch and the number one consumer on the economic ropes, OPEC's decision is symbolic, said Christopher Jarvis, analyst at Caprock Risk Management.
OPEC's move followed months of calls for more oil from top consumer the United States and the International Energy Agency (IEA) that represents the interests of 26 industrialized nations.
It's the responsible thing for OPEC to do given the market needs more oil with the higher seasonal requirements ahead, said Gary Ross, CEO at PIRA Energy Consultancy.
The increase comes on top of current OPEC supplies and takes the output target for the 10 members bound by the agreement -- Iraq and new member Angola stand outside -- to 27.2 million bpd.
It reverses most of the 1.7 million bpd of cuts agreed by the group since Oct 2006 because the OPEC 10 were already pumping almost one million bpd above their nominal ceiling.
It's probably a smaller increase than we would have liked to see but it's more than the market was expecting a couple of days ago, Lawrence Eagles, head of the IEA's Oil Industry and Markets Division, told Reuters.
OPEC, as a group shipping some 30 million barrels per day into the 86 million bpd global market, has been trying to make sense of conflicting economic data before peak winter demand.
Industrialized consumer nations were forecasting their crude oil stocks would fall to the bottom of the five-year average range by January without more OPEC oil, and fast.
But uncertainty over the U.S. economy -- last month employers cut jobs for the first time in four years -- has cast doubt over oil demand growth in the world's top consumer.
The views of the Gulf Arab states, particularly the world's biggest exporter Saudi Arabia, are key to OPEC policy decisions. They straddle more than half of OPEC's proven oil reserves and have almost all the organization's spare production capacity.
An increase of 500,000 bpd should placate consumer nations without flooding the market and causing a price collapse.
Before the meeting some ministers were concerned credit turmoil stemming from U.S. subprime loans -- risky mortgages -- might hit the real economy.
The ministers are worried about financial markets and also the backwardation in U.S. crude oil futures -- so it is a very sensitive situation, Badri said.
U.S. crude oil for October delivery costs more than later months, a backwardated price structure that may point to a tight market and encourage refiners to draw oil from stocks.
Demand forecasts for the final quarter of the year show an increase of up to 2.0 million bpd. At the top end, the IEA sees consumption rising to 88.1 million bpd. OPEC puts the figure at 87.08 million bpd.
U.S. Secretary of Energy Sam Bodman told reporters in Florida on Monday he had encouraged OPEC to increase supplies.
They heard. They were courteous, he said.
Simon Wardell, energy analyst at Global Insight, said even with extra OPEC oil global crude stocks could fall by 100 million to 150 million barrels by the end of the year.
That will push global inventories down to their lowest levels since 2004, with a risk that they could fall further if there is a cold winter, he said.