Oil prices climb to record high

| 3/16/2005

Crude oil prices closed at record price of $56.46 a barrel Wednesday, March 16, despite a decision by OPEC to produce more oil.

Driven by fears of a supply crunch next winter, the Organization of Petroleum Exporting Countries agreed to immediately widen the spigot to pump an extra half-million barrels of oil a day and to approve a similar boost later if prices do not fall.

However, there was not significant reaction in the oil markets because OPEC members – who are supposed to be bound by the organization’s production quota – were already producing 700,000 barrels a day more than the set amount, The Associated Press reported. That means no extra supply will actually be added.

In response, light, sweet crude for delivery in April jumped as much as $1.30 to $56.35 a barrel in afternoon trading on the New York Mercantile Exchange, where traders were also reacting to a U.S. government report that showed a steep decline in gasoline and heating oil inventories last week.

The highest New York exchange settlement price for crude is $55.17, set twice last October. The previous high price for oil during the day, set in October 2004, was $55.67.

The decision to raise output will officially raise the group’s ceiling to an all-time high of 27.5 million barrels a day. But, according to AP reports, OPEC is already producing close to 29.5 million barrels a day, when Iraqi production quota-busting by other nations is factored in. Iraq is exempt from OPEC quotas.

Comments from OPEC oil ministers earlier in the week left at least one oil analyst saying the cartel’s decision was not surprising. However, that analyst – Ed Silliere, a broker at Energy Merchant Intermarket Futures in New York – told The AP that the sharp decline in gasoline supplies that took place last week did upset the market.

“The gasoline number was a complete shock,” he told the news service.

The U.S. inventory of unleaded gasoline – as measured by the Department of Energy – dropped by 2.9 million barrels last week to 221.4 million barrels. However, the marketplace still has 9 percent more gasoline than it had at the same time last year, The AP reported.

U.S. supplies of distillate fuel, which include heating oil, diesel and jet fuel, shrank by 1.9 million barrels to 107.3 million barrels, or about 1.5 percent less than a year ago.