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Divided OPEC Losing Control of Oil Market

Friday, 10 Jun 2011 | 2:27 AM ET

As OPEC ministers met in Vienna this week it became clear that the cartel is now divided between those wanting to raise output, like Saudi Arabia, and those wanting to hold it and keep prices high.

AP

“There was a time when rumors of the break-up of OPEC would have sent the oil price plummeting and would have given equities a boost” said Stephen Lewis, chief economist at Monument Securities in a research note.

“OPEC did not break up this week, but the acrimony between members suggested it would no longer function as an effective agency regulate supply in the crude oil market.”

With oil gaining and equities rising as OPEC met, Lewis believes investors now think the cartel’s power is waning.

“Their reaction shows how little influence OPEC decisions are seen to exercise nowadays over global oil supply and prices," he wrote.

There was a time when OPEC was all powerful in the oil market and had the fire power to keep prices artificially high. This is no more, according to Lewis.

“The realities of global supply and demand have been such, in recent times, that OPEC has lost control over the crude oil market,” he said.

“Prior to this week's OPEC meeting, member states, in aggregate, were producing at rates well above the sum of the official quotas they had previously agreed among themselves,” said Lewis.

The fact that prices where trading above $100 a barrel for both WTI and Brent crude showed that producing more than the quota did little to ease price pressures.

“Only Saudi Arabia and the other Gulf Arab states would be in a position to step up their output to take advantage of the extra quota. This was probably transparent to other OPEC members, which may well, be why they opposed the plan,” said Lewis.

“The suspicion must be that stronger growth in the emerging countries is depleting oil inventories there at a faster rate than in the OECD. Those OPEC nations that have been arguing against an increase in output quotas maintain that world oil inventories are currently ample. This claim looks to be based on incomplete data,” he said.

With high oil prices hitting business and consumer sentiment in the developed world the Saudis may push ahead and raise output even without agreement with their OPEC partners.

“This is likely to serve only to stabilize oil prices, however, in view of adverse supply factors elsewhere in the world,” said Lewis.

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