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Meeting the demand for oil

A gathering of OPEC ministers generally draws nervous anticipation from oil traders, who watch for any move that could send the market into costly fluctuations.

This week, however, the world is expecting almost nothing from the oil cartel.

The Organization of Petroleum Exporting Countries, whose members are pumping nearly all the oil they can, has been powerless in recent months against stubbornly high prices.

Analysts say the 11 OPEC members can only try to reassure consumers that they're making fundamental changes to address the tightest supply-demand environment in decades.

"No matter what they decide, in the near term, it'll have no practical physical impact on the market," said Larry Goldstein, president of the Petroleum Industry Research Foundation. "The market is setting the price."

The group's oil output targets and price targets will draw the most attention, but analysts question whether the members can raise production fast enough to prevent a disastrous supply crunch.

With higher prices drawing sharp rhetoric in the U.S. presidential campaign, ministers' comments could have "enormous political connotations," Mr. Goldstein said.

Oil prices have remained above $40 since mid-July, supporting higher gasoline prices and threatening the world's economic recovery.

West Texas intermediate crude, the U.S. benchmark, hit a record $49.40 a barrel last month before retreating.

Oil for October delivery gained $1.06 to $43.87 Monday on the New York Mercantile Exchange as Hurricane Ivan disrupted production in the Gulf of Mexico.

OPEC members are taking advantage of the strong prices, collectively pumping at the highest rate in a quarter-century.

Output quotas

Among the topics up for discussion when ministers meet formally Wednesday in Vienna, Austria, is whether to raise output quotas to send clearer signals to the market.

Actual oil output from the cartel, excluding Iraq, is already 2 million barrels over the group's agreed target of 26 million barrels a day. Raising quotas could legitimize existing production levels.

Suspending quotas altogether – officially letting all members pump whatever they want – could reinforce the organization's pledge that it wants to force prices down from dangerous territory.

But the message would be entirely psychological, with no real effect on supply and demand.

Most of the 11 members have no additional oil to offer the market. Iraq, one of the few with the capacity to pump more, has been stymied by militant attacks on export pipelines and other infrastructure.

Saudi Arabia's role

Saudi Arabia, the world's largest exporter and the market's traditional swing producer, has been the historical savior when volatility overtakes prices.

But attempts by Saudi officials to reassure the market have been met with even more concern – that the OPEC kingpin is down to the last of its capacity.

"They've lost the ability to jawbone the price," said Dave Pursell, executive vice president of Pickering Energy Partners. "What do you do? They've got to go and prove they've got the ability to increase capacity."

To encourage investment in new capacity, OPEC members will consider raising their target price for oil.

OPEC established a price band of $22 to $28 for a basket of seven oil varieties, which trade a few dollars below the U.S. benchmark price, in March 2000.

Although members agreed to adjust their production if the average price rose above or fell below that range, the target has largely become irrelevant to the market.

OPEC's basket price rose above the $28 mark in December and has remained there, climbing above $43 a barrel last month.

Some analysts expect ministers to consider raising the band by as much as $6 a barrel.

"There's a continuing sense that the whole market has shifted," said George Gaspar, an analyst at Robert W. Baird & Co. Inc.

An increase in the price band would "send a signal that there's more reality setting in that it's going to be increasingly difficult for the price of crude to fall back below the mid-$20 range," Mr. Gaspar said.

Price thresholds

Major oil companies have raised their price thresholds for investing in projects, assuming that long-term prices will stay above the low-$20 level instead of the high teens.

Executives from the world's biggest companies are meeting oil ministers in Vienna this week to discuss the industry environment. With OPEC members facing capacity constraints, oil giants could offer opportunities to expand infrastructure to bring more oil online.

Lee Raymond, chairman and chief executive of Irving-based Exxon Mobil Corp., will make a presentation Thursday "to give his perspective on supply and demand and technology," a company spokeswoman said.

Some analysts say oil prices could decline, especially if instability subsides in Iraq and other fear factors are removed from the market.

But growth in world oil demand – a key driver of today's higher prices – is expected to continue into next year. Analysts say OPEC must show the world that it can continue providing oil, or risk losing to non-OPEC producers or alternatives sources of energy.

"OPEC's in a bit of a quandary," Mr. Pursell said. "This market has gotten away from them. But it's not a bad thing, because they're all making lots of money."

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