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The Irrelevance of OPEC

By Stanley Reed Who cares about the Organization of Petroleum Exporting Countries? On the surface, the oil cartel's meeting now underway in Vienna looks irrelevant. The oil ministers, ensconced in grand suites in the well-padded hotels of the Austrian capital, are debating whether to lift their quotas. But their decision will be only symbolic, no matter what they decide or pledge.

Fact is, OPEC is willing to sell whatever its customers want. And those customers are turning up their noses at the 2 million barrels per day or so of heavy crude -- most of it in Saudi Arabia -- that OPEC is not pumping now.

Their refineries just aren't set up to run the stuff. "What can OPEC do?" asks Jamal Qureshi, an analyst at PFC Energy, a Washington, D.C.-based energy consulting firm.

CRUDE AND UNREFINED. OPEC mainly holds sway over crude supplies, and they are not the big problem these days. In fact, two weeks after Hurricane Katrina smashed into the Gulf Coast of the U.S., a widening divide has opened between the crude and products market.

Thanks to OPEC's energetic pumping in recent months, crude is quite well-supplied worldwide, despite the mini-panic that shot prices up about $4, to top $67 a barrel, on the New York Mercantile Exchange Sept. 19.

Driving prices higher are fears that Tropical Storm Rita, expected to hit Florida Keys on Tuesday, might also churn through the Gulf of Mexico petroleum zone. But it's not crude that's in short supply. Stocks are around 308 million barrels, well above average.

RUNNING LEAN. And the U.S. government has had only a tepid take-up on its offer to supply refiners from the Strategic Petroleum Reserve. Clearly, the industry isn't all that thirsty for crude.

On the other hand, gasoline stocks remain a lean and mean 192 million barrels, indicating the crunch bedeviling consumers arises not so much from OPEC and output, but from refining capacity in the U.S.

For some time now the story has been gasoline, not crude. A refinery system straining to keep up with demand has been keeping gasoline prices high, lifting crude prices along with them (see BW Online, 9/20/05, "Richard Branson, Oil Tycoon?")

RITA'S THREAT. With summer winding down and driving in decline, the thinking was that markets would head into into a softer period for prices. Traders reflected this change in early September, when they dumped crude and product futures, pocketing their profits from Katrina.

But the emergence of Rita, which could intensify into a major hurricane, has them rebuilding long positions and covering any shorts (trader jargon for a bet that the price is going to fall). Serious outages from Rita or other storms could change the plentiful crude picture.

Soon winter, traditionally the season of highest prices and demand, will be upon us. There is some concern about shortages of heating oil in the U.S., although stock levels now are moderate.

SEEKING AN EDGE. Much will depend on how cold it gets -- something traders are already trying to gauge by studying long-range weather forecasts.

They are looking for an edge anywhere they can find it, including the Farmers' Almanac, which is forecasting a cold winter for the Northeast, where heating oil is used heavily.

In the meantime, OPEC faces a public reminder of how little control it exerts when it is already pumping all the oil its customers want.

Reed is London bureau chief for BusinessWeek

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