The Organization of Petroleum Exporting Countries didn’t come to the rescue, however. In a contentious meeting in Vienna on Wednesday, the 12-nation group failed to agree on new production targets. That sets the stage for higher prices for oil and gasoline later this year as global demand for oil rises faster than supplies.
Saudi Arabia lobbied for an increase in output, which likely would have likely lowered oil prices. But countries such as Iran resisted, arguing that oil supplies are adequate to meet demand and current prices are appropriate.
“We are unable to reach consensus,” OPEC Secretary General Abdullah Al-Badri told reporters after the meeting in Vienna ended. Saudi oil minister Ali Naimi called the meeting “one of the worst ever.”
Traders were surprised and oil prices climbed. Benchmark West Texas Intermediate for July delivery gained $1.65 to settle at $100.74 per barrel on the New York Mercantile Exchange. In London, Brent crude added $1.07 to settle at $117.85 per barrel on the ICE Futures exchange.
Many analysts were almost certain that OPEC would increase production. OPEC not only supplies 34 percent of the world’s oil — about 29.7 million barrels per day — it has the unique ability to crank up production as needed. Other oil-producing countries, such as Canada, Russia and Mexico, don’t have that flexibility.
Global oil consumption is expected to increase by 2 percent this year to an average of 88.4 million barrels per day.
While the Saudis and the Iranians are frequently at loggerheads over pricing at OPEC meetings, member countries usually fall in behind the lead of Saudi Arabia, which produces most of the group’s oil. This time the Saudi-Iranian rivalry resulted in a deadlock.
The International Energy Agency in Paris had urged oil producers to put more crude on the market. “Ongoing supply disruptions, as well as the fragile state of the global economy, call for a prompt increase in supply,” the agency said.
The oil market has been worried for months that unrest in Libya and Yemen could destabilize larger oil-producing nations in the region. The two countries normally produce less than 4 percent of the world’s oil needs. Saudi Arabia and others have boosted output to make up for much of the shortfall, but concerns remain that unrest could intensify across the region and disrupt supplies.
Oil prices jumped 25 percent from January through April as global demand grew to the highest level on record while violent uprisings in North Africa and the Middle East threatened oil fields and cut off Libya’s oil exports.
The price of gasoline soared as well. The national average in the United States grew 28 percent to record levels from January through early May, nearly topping $4 per gallon. Motorists reacted by driving less. Consumer confidence suffered as more money went to the pump. Though gasoline prices have dropped 21 cents in the past month, they’re still above $3.70 per gallon and analysts say they’ll continue to squeeze budgets this year.
The U.S. Energy Information Administration’s said this week that it expects the global thirst for oil to outpace the industry’s ability to pump it by 1.81 million barrels per day between July and September. That’s the largest shortfall since the final three months of 2007.
Capital Economics said OPEC would need to boost production by 1.5 million barrels per day to help keep prices in check.
Saudi Arabia has indicated a willingness to supply whatever the market needs. Analyst Jim Ritterbusch thinks the Saudis will quietly increase exports regardless of their quota, since keeping prices under control is in their best interest.
“They don’t want countries to turn to alternative fuels,” he said. “They don’t want people on buses.”
But J.P. Morgan analyst Lawrence Eagles questioned if Saudi Arabia really could meet increased demand and believes the lack of an agreement “seems to highlight the limited spare capacity among many (OPEC) members.” That’s one reason he expects Brent crude will rise to an average of $130 per barrel this year.
Rep. Ed Markey of Massachusetts said the U.S. must be prepared to use its Strategic Petroleum Reserve to “head off an economic collapse from continued high gas prices.” Most experts agree that tapping the reserve wouldn’t make much difference in prices, since the U.S. already has one of the largest petroleum surpluses on record, not including the strategic reserve.
The EIA’s weekly report on petroleum supplies showed a drop of 4.8 million barrels of oil, but supplies are still more than 2 percent above year-ago levels. Much of the decline happened in the Midwest, where problems with a pipeline system temporarily halted deliveries from Canada. Gasoline supplies grew by 2.2 million barrels, while the four-week average demand number inched up for the first time in 11 weeks.
Gasoline pump prices dropped another 1.3 cents on Wednesday to a national average of $3.748 per gallon, according to AAA, Wright Express and Oil Price Information Service. A gallon of regular is 21.2 cents cheaper than it was a month ago, but remains $1.03 higher than the same time last year.
In other Nymex trading for July contacts, heating oil added 1.67 cents to settle at $3.0937 per gallon and gasoline futures fell by 1.32 cents to settle at $2.9787 per gallon. Natural gas rose 1.6 cents to settle at $4.847 per 1,000 cubic feet.