The OPEC ministerial meeting in Beirut on June 3 came out with a compromise decision, taking out some heat from the global market prices and at the same time ensuring that oil prices do not drop to the $10 a barrel mark, as was the case in not too distant a past.

Despite vows to balance the markets and ensure correcting the fundamentals responsible for the current episode of higher than normal prices, there were countries within the oil producers’ group which did not want to increase the production beyond a certain point. On the other hand, countries such as Saudi Arabia and some other Gulf states stressed on adequate measures to satisfy the global market needs. In the words of Saudi Oil Minister Ali Al-Naimi, there is no division with the OPEC. Indeed there are doves and there are hawks and every one has a viewpoint. Thus despite controlling just about 30-35 percent of the entire global crude market, Saudi Arabia and the other OPEC member states wanted to play responsibly, so as to ensure that both the consumers as well as producers’ interests are not compromised. They were thus cautious in their approach and to a very great extent there was logic in their cautious approach toward the entire issue.

The OPEC decision in Beirut of increasing the output quota by 2 million barrels a day from July 1 and by another 500,000 barrels a day from Aug. 1 has to be seen in this perspective. The OPEC has also announced that the group would again meet in Vienna on July 21 to consider the market situation then and barring any dramatic developments in the meantime, it would go ahead with the additional 500,000 bpd output increase from Aug. 1. In fact, there have also been indications, from some OPEC delegations that in case required, the OPEC July 21 meeting may also consider output increase of more than 500,000 barrels per day (bpd).

The OPEC decision has already succeeded in taking out some heat from the global crude prices. Although by the time these lines are being written, it is still too early to ascertain the impact of the OPEC decision on the oil markets, yet some cooling effect is definitely there. Yet skeptics do not seem very appeased from the OPEC decision!

Societe Generale economist Deborah White described OPEC’s decision as a “non-event for the market,” as in effect, the latest OPEC decision would only formalize the current overproduction.

Roger Diwan, from the Washington-based Petroleum Finance Corporation (PFC), explained that the high prices were the result of “strong demand, logistical problems and tensions in the Middle East.”

“None of these factors will disappear in the short term. Therefore, the decision does not change the balance,” he said.

Some of the analysts were quick to point out that the cooling effect witnessed after the OPEC announcement last Thursday was not the result of the group’s decision, rather it was because of the revelation that the US inventory levels have gone up considerably.

While the OPEC was considering in Beirut last Thursday on steps to be taken to cool down the crude market prices, the US Energy Department reported that the US crude stocks for the week ending May 28 were up by 2.8 million barrels to 301.7 million barrels.

Motor gasoline supplies were also reported up by 1.3 million barrels in the latest week to 204.3 million, the data showed.

A separate report by the private American Petroleum Institute showed crude oil stocks up 860,000 barrels to 300.7 million in the same period and gasoline inventories up 2.8 million to 200.725 million barrels.

“Clearly, it’s much more the US stock data than the OPEC meeting which triggered the price drop,” said Societe Generale analyst Frederique Lasserre. Indeed if the oil prices came down below the $40 a barrel mark in New York, it was mainly due to the announcement of the US energy data confirming that the inventories were at the highest levels since August 2002, helped along by near-record imports of 10.7 million barrels daily.

If this line of thinking is to be acknowledged then it to a very great extent seconds the OPEC view that the current heated market condition was primarily not because of any short supply in the market, rather it was because of fundamentals much beyond the control of the oil producers’ group.

Indeed the OPEC cannot have influence on any US decision to increase its crude oil inventories. If the emphasis in the US, the world’s largest importer and the consumer, remains on increasing the inventory, then despite greater supplies, the markets may start feeling the pinch.

To a great extent the OPEC stands vindicated!