OPEC signaling era of expensive oil, analysts say

OPEC signaling era of expensive oil, analysts say

Michael Adler, Agence France-Presse, Vienna

A decision by OPEC to suspend its low price target for crude oil and members' comments that high prices have not hit world economic growth are clear signs of a new era of expensive oil, analysts say.

OPEC decided at a meeting in Vienna on Sunday to keep oil production steady in the face of increased cold weather demand during the northern winter but also hinted that high prices for crude were here to stay and that it may cut output soon.

"Prices are likely to remain higher than past averages," Adam Sieminski, an analyst with Deutsche Bank in London, told AFP on Monday.

The inflation-adjusted price for oil over past decades is about US$25 a barrel, Sieminski said, adding that while the $55- dollars-a-barrel oil spike last year "was a short-term phenomenon" the 11-nation Organization of Petroleum Exporting Countries( OPEC) had a "realistic" chance of sustaining prices above $30 a barrel.

OPEC, which supplies nearly a third of the world's crude oil, refrained from cutting back on output with demand expected to slacken ahead of warmer spring weather in the United States and Europe and maintained "currently agreed production levels" of 27 million barrels per day (bpd), a joint statement said.

Raja Kiwan, an analyst from Energy Intelligence Research publishing house in London, said that OPEC was just trying to avoid "taking a sort of political responsibility for what's happening in the market", where winter weather and insecurity about hotspots like Iraq is keeping prices high.

OPEC doesn't want to create a backlash against it for stubbornly high prices in consumer countries, where people are groaning about their heating bills and how much they are paying to fill up their cars with gas, Kiwan said.

But he said OPEC would move fast to cut production if prices fell significantly.

In another key move, OPEC "temporarily" suspended its target price band of $22-$28 a barrel since "market changes ... have rendered the band unrealistic", the statement said.

OPEC had adopted the target price band in early 2000 but prices have soared well above that in the last year.

OPEC president Kuwaiti Oil Minister Sheikh Ahmad Fahad al- Sabah said a price band of $32-$35 would be "a good price", remarking that the $22-$28 range was effectively defunct.

In a sign that high prices do not bother OPEC, Fahd al-Sabah said that in 2004 growth worldwide was still a healthy five percent and "we think even this year growth will continue at 4.1 percent, even with security factors".

Sieminski cautioned, however: "This is an easy statement to make when global gross domestic product is growing at one of its fastest rates ever. But when world growth slows down, the impact of higher prices might become more apparent."

Another analyst, Bruce Evers of London's Investec Securities, said that OPEC was probably looking to defend a $40 a barrel price for oil.

He said that Saudi Arabia, the world's largest producer of oil, had "a massive (domestic) social spending plan" and needed revenue.

"The markets are coming around to the realization that prices in the 40's don't damage the world economy, especially with the weak dollar," Evers said.

Analysts agreed that the oil market was very tight and that the evolution of prices depended on factors such as demand from booming developing economies like China and supply from troubled producers like Russia and even OPEC states such as Saudi Arabia, which still needed investment and time to increase its production capacity.

Sunday's election in Iraq, an OPEC member but not included in the cartel's production quotas, was seen as a hopeful sign, with a high turnout and limited violence. "This could take some fear premium out of the oil price," Sieminski said.

"Maybe Iraq can keep its production at two million bpd (barrels per day)," he added.

World oil prices fell below $47 a barrel on Monday with New York's main contract, light sweet crude for delivery in March dropping 67 U.S. cents to $46.51 a barrel in electronic deals.

"No oil export infrastructure was attacked (on election day) so oil output from Iraq continues," said Victor Shum, an analyst at energy consulting firm Purvin and Gertz in London.