The International Energy Agency this morning announced that it was raising its projection of crude oil demand increases in 2010 by 30,000 b/d, to 1.7 million b/d. Total demand is now expected to reach 86.6 million b/d.

Brazil, Russia, India, China, Iran, and Saudi Arabia are responsible for 75% of the increase, according to the IEA. Of those six countries, four are major producers of crude, and the increase in demand is at least partly attributable to efforts to produce more oil. Producers are willing to invest some of their higher profits into increasing production as prices rise.

Crude oil prices had traded in the $70-$80/b range for about six months before breaking the $80/b barrier a few weeks ago and topping out at about $87/b. Analysts from Goldman Sachs and Morgan Stanley quickly predicted $100/b oil in 2011, and today’s announcement from the IEA could drive oil to those heights even more quickly.

Yet crude is down more than $1/barrel today, currently trading at $83.25/b. That drop is counter-intuitive except for one thing: OPEC. The cartel has said for over a year that it believes that the $70-$80/b range for crude is a sustainable level, both in terms of OPEC profits and a minimal effect on the recovering global economy.

OPEC is worried that if the price of crude breaks into the $90-$95/b range, demand will fall and current production levels, which are already higher than agreed-upon quotas, will go up as OPEC members try to make in volume what they have lost in price.

One unidentified OPEC delegate has said that if prices above $90/b appear to be sustainable, the cartel will consider increasing production. Libya’s oil minister noted, however, that prices would have to be sustained above that level for some time before OPEC would consider raising production quotas.

The pullback from recent price rises brings some reality back into the crude pricing picture. The Saudis are believed to have around 4 million b/d of spare capacity which can be brought back into production fairly quickly. It is this 4 million barrels that is injecting some reality into crude prices.

The Saudis always look at the physical supply of oil, not its futures price. If the physical market is well-supplied, but prices are still rising, the Saudis usually just blame speculators. Like Goldilocks, the Saudis want a price that is not too low to support further investment nor too high to allow a substitute fuel to destroy demand for crude.

It is the Saudis spare capacity that OPEC can use as a weapon against oil market speculation. But it can’t wait too long, or the piling in of investors will build a momentum trading frenzy where everyone wants to go long oil. Sound familiar?

If OPEC, and the Saudis especially, are serious about a reasonable price for crude, the Saudi oil minister needs to issue a statement threatening to use Saudi spare capacity to keep prices around $80/b. If the past is any guide, that statement won’t come until crude prices go above $90/b and stay there for several months. That will be too late. The statement needs to come now, or as soon as crude prices climb past $85/b again.

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