MercoPress. South Atlantic News Agency

Limited refining capacity keeps oil prices strong

OPEC producers considering an increase in oil output limits said they were powerless to rein in prices which this week were back in the 55 US dollars per barrel.

The Organization of the Petroleum Exporting Countries says it is operating close to full crude supply capacity and can do nothing to combat a global squeeze on refined products, particularly diesel.

Ahead of a Wednesday OPEC meeting in Vienna, leading producer Saudi Arabia was among several backing a proposal for an increase in formal cartel crude supply limits of 500,000 bpd, equivalent to 2%.

"I think everybody will support it, but I don't think it will have any impact," said Algerian Oil Minister Chakib Khelil.

Ali al-Naimi, oil minister for Saudi Arabia said Riyadh was already pumping as much as it could sell and blamed refinery bottlenecks for keeping the heat under energy costs.

"You know and I know that what is driving the price is not supply ? it's the lack of refining capacity worldwide" Mr. Naimi told reporters in Vienna. "Everybody is concerned about middle distillates" he said in reference to the refined products diesel, jet fuel and heating oil. Traders said the remarks helped underline market concerns about the ability of refiners to meet rising demand in the second half of the year.

"Diesel prices have been sustained by several factors including strong global demand, extended refinery maintenance on upgrading units, and refinery disruptions in the Caribbean (hurricane season)", said Goldman Sachs.

The average price for the year so far is nearly 51 US dollars pb, up from 41.47 on average in 2004 and 30.99 in 2003. Last year's Chinese-led demand boom took producers and refiners by surprise after years of slow investment in capacity across the upstream production and downstream refining industry sectors. Led by Saudi, OPEC is trying to rebuild spare capacity but for the time being the group is at full stretch.

"OPEC members are already pumping at full capacity and can do nothing about prices," said Iranian oil minister Bijan Zanganeh.

So far, the world economy has largely absorbed higher energy costs, helped in part by government subsidies in emerging economies.

But OPEC worries that a sustained period of oil at 50 US dollars pb could hit long-term demand and create an incentive for investment in alternative fuels.

"More than 50 to 55 US dollars for the long term it seems is not good for the world economy" said Zanganeh. "It seems in the long term a very high price will probably have a bad effect on the world economy, and we prefer not to witness this situation, but I think OPEC cannot do anything."

A 500,000 bpd increase in official OPEC output limits would take output for 10 members with quotas, excluding Iraq, to 28 million barrels daily. But it is unlikely to make much difference to current OPEC supply.

"We are already doing more than the ceiling. There might be a legitimization of the overproduction," said Edmund Daukoru, Nigeria's presidential adviser on energy.

"We should target a barrel price below 50 US dollars", said Ahmad al-Fahd al Sabah, OPEC president, who anticipated a majority consensus to increase output.

Mr. Ahmad al-Fahd al Sabah forecasted OPEC plus Iraq production to reach 30,5 to 31 million bpd in the fourth quarter.