sg.biz.yahoo.com Thursday March 20, 2:29 AM

LONDON (Dow Jones)--Total output in February from the Organization of Petroleum Exporting Countries including Iraq increased 1.5 million barrels a day from January to 27.10 million b/d, OPEC said in its monthly oil market report.

Output from the OPEC-10, which excludes Iraq - whose exports were controlled by the U.N. - was up in February from the previous month, by 1.52 million b/d to 24.662 million b/d, the report said.

At an emergency meeting in January, the group increased its output ceiling 1.5 million b/d to 24.5 million b/d to cover oil lost due to a general strike in Venezuela.

In February, the bulk of the production increase came from OPEC kingpin Saudi Arabia which produced 8.793 million b/d - a 362,000 b/d hike from the previous month.

Saudi output is believed to be even higher now.

The International Energy Agency estimated Saudi Arabia's output was at 9.2 million b/d in early March - in line with the Kingdom's repeated pledges to keep customers well-supplied in the event of any disruption to Iraqi oil exports during a war.

Venezuelan output was also up in February by 881,000 b/d to 1.475 million b/d, the report said.

Industry sources say that Venezuelan production is unlikely to go much higher than 2.5 million b/d due to damage to fields during the strike. Venezuela was producing around 3 million b/d before the industrial action.

www.chron.com March 19, 2003, 4:13PM Reuters News Service

LONDON - World oil prices fell again today, deepening a five-day rout that has knocked 21 percent off the cost of a barrel as dealers brace for an impending U.S. invasion of Iraq.

Prices have tumbled $8 in the last five trading days as dealers bet hard on an easy U.S.-led victory in military action they expect to cause only a brief disruption to Middle East oil flows.

U.S. crude futures for May delivery dropped 69 cents, or 2.3 percent, to $29.36, following Tuesday's nine-percent drop. The April contract, which saw only thin volumes ahead of its expiry Thursday, fell $1.79 to $29.88, the lowest level since early January.

International benchmark Brent crude oil dropped 50 cents, or 1.8 percent, to $26.75 a barrel in London, hitting a 3-month low.

"Prices have behaved as they would do after a very quick war, involving no destruction of oil infrastructure and fairly immediate post-war post-war political stability both inside Iraq and elsewhere," said Paul Horsnell of J.P. Morgan bank in a report.

The U.S. deadline for Iraqi President Saddam Hussein to quit Baghdad or face war stands at 8:00 p.m. EST Wednesday , but Saddam has already rejected the ultimatum.

All international U.N. staff, including weapons inspectors, have been evacuated from Iraq. Kuwaiti sources said U.S.-led troops had already moved into the demilitarized zone that straddles the border with Iraq.

Fears of a strike on Iraq and wider disruptions to Gulf supplies drove U.S. crude close to $40 last month, approaching the $41.15 record set in the buildup to the 1991 Gulf War.

During that war, prices dropped from over $30 to $20 when U.S.-led forces launched an offensive to expel Iraq from Kuwait, once it became clear Iraq would not harm oilfields in Saudi Arabia, the world's top exporter.

Dealers said the five days of falls had removed some of the "fear premium" in oil prices. Saudi Oil Minister Ali al-Naimi said in an interview published Wednesday it could be as large as $10.

"The fall indicates the market is looking beyond war. People are not expecting Saddam to have a scorched-earth policy," said Han-Pin Hsi at Deutsche Bank in Hong Kong.

Prices could easily spike back up if Iraq torches its own oilfields, or the conflict is drawn out.

An invasion will almost certainly close Iraqi crude output of 2.5 million barrels per day (bpd) and its southern neighbor, Kuwait may also be forced to shut some fields near its border.

Oil giant Royal Dutch/Shell said Wednesday it had closed an oilfield in Iran, close to the Iraqi border, because of its proximity to the potential conflict zone.

"The fall occurred before the start of war, and oil traders have no inside track on the war and its implications," said J.P. Morgan's Horsnell.

"Prices have been moved by a speculative bet of staggering proportions," he added.

IRAQ EXPORTS SLOW

Iraqi oil exports, ranked seventh largest in the world, have already slowed dramatically this week because most Western companies are unwilling to take the risk on uncertain supplies.

The president of OPEC spoke to the West's energy watchdog, the International Energy Agency, and told it the cartel would do its best to fill any supply gap caused by war.

Many members have already increased supplies to their full capacity and analysts believe any prolonged outage of Iraqi supply, with some impact on Kuwait, would test the group's spare capacity to the limit.

A cold northern winter and prolonged supply hitch from Venezuela have already drained commercial stockpiles to historic lows in the world's top oil consumer, the United States.

The United States is ready to release oil from its strategic reserves to prevent a severe supply interruption, but only as a last resort if OPEC producers are unable to overcome the shortage.

The U.S. Energy Department said Wednesday a halt in Iraq's oil exports would not automatically trigger a release of the U.S. Strategic Petroleum Reserve.

The spokesman said no decision was "imminent" on whether to release oil from the stockpile. Any decision would probably be taken in tandem with the International Energy Agency, which monitors government oil stocks in 26 industrialized nations.

These stocks, added to reserves held by industry, could cover those countries' total import needs for 114 days.

www.forbes.com Reuters, 03.19.03, 1:44 PM ET By Pablo Bachelet

WASHINGTON, March 19 (Reuters) - A rosier economic outlook for most of Latin America in 2003 could be clouded by a prolonged war in Iraq that would send oil prices upward, a group of global financial institutions said on Wednesday.

The Institute of International Finance (IIF) is forecasting a 2.4 percent growth rate for almost all countries in Latin America this year, reversing two straight years of economic contraction.

But that recovery depends on lower oil prices in the second half of the year and improved investor and consumer confidence that would in turn spur the U.S. and European economies, the main motors for a Latin American recovery.

The 2.4-percent growth forecast, which would be the highest since 2000, excludes Venezuela, which saw its economy shrink 8.9 percent last year and could see a further 10 percent drop in 2003, according to the IIF report, which is to circulate at the annual meeting of the Inter-American Development Bank (IDB), to be held in Milan on March 24 and 25.

Venezuela has been ravaged by political strife and a strike that hit oil exports, the lifeblood of its economy.

"We do believe that the region is largely well-positioned, I would even say poised, for some modest recovery on the critical assumption that in the second half of this year the global economy rebounds," said Charles Dallara, managing director for the industry group that represents most big banks and insurance companies worldwide.

Latin America, hard-hit by massive downturns in Uruguay, Argentina and Venezuela last year, has been struggling to regain its economic footing since private capital flows dried up in the late 1990s.

But now a war in Iraq could extend Latin America's hard times.

"So much depends upon the duration of the war and the ultimate effect on two key variables: oil prices and confidence among consumers and investors," Dallara told reporters at a briefing.

The Latin America forecast also assumes that Mexico and Brazil will undertake key fiscal reforms in the second half of the year to spur growth.

Latin America is viewed as less vulnerable to global economic shocks than in the past, Dallara said.

"We believe the commitment to sound macro policies and the commitment to flexible exchange rates creates some cushion to respond to global shocks," he told reporters at a briefing.

CHEAPER OIL

Even so, the base scenario behind the bullish Latin America forecast calls for oil prices to average $28 per barrel this year. This would enable the U.S. economy to grow 2 percent for the year, with a 4-percent jump in the second half of 2003. In early afternoon, international benchmark Brent crude oil was trading at $27.50 per barrel.

But the group's chief economist, Yusuke Horiguchi, said that an average $10 per barrel increase for the year in the price of oil would shave off 0.6 or 0.7 percentage point from gross domestic product growth in rich oil-importing economies. This would cool the growth of imports by 2.5 percentage points.

"The elasticity is pretty big," he said. "This affects exports" from Latin America to rich economies.

The IIF did not provide a specific growth number for a high-oil-price scenario. However, most economies, with the exception of big oil exporter Venezuela, would suffer.

Oil importer Chile would suffer a "double whammy" effect of higher crude import prices and cheaper prices for its copper exports, according to Frederick Jaspersen, director for the Latin America department at the IIF.

For oil producer Mexico, an annual price per barrel of $40 would translate into $6 billion in extra earnings. But that would be offset by a $9 billion drop in exports to the U.S., due to a slowing economy there.

"Mexico is affected in a counterintuitive way," he said.

www.rferl.org By Michael Lelyveld

Despite a meeting with Saudi Arabia, Russia can do little to pump up oil production or stabilize the world energy market during a war with Iraq, experts say. The country has already reached its export limit, and Moscow now seems more worried about what Saudi Arabia will do to prevent a sudden price drop after the war ends.

Boston, 19 March 20003 (RFE/RL) -- A meeting between top Saudi Arabian and Russian energy officials has shown how little Moscow can do to keep oil prices in check during the Iraq crisis, analysts say.

Last week, Saudi Petroleum Minister Ali bin Ibrahim al-Naimi flew to Moscow to meet with Russian Energy Minister Igor Yusufov, where they reached an agreement on stabilizing oil prices, according to Russian and Saudi news agencies.

Al-Naimi's three-day visit may have given the market some assurance that the world's two biggest oil producers are cooperating to prevent a price spike on the eve of war with Iraq.

But experts say that only Saudi Arabia has the ability keep prices from soaring out of control, while Russia appears stuck with the same limits on pipelines and ports that have kept its industry in a straitjacket for months.

The situation may bring an abrupt end to Russia's claims over the past year that it has the power to offset actions by the Organization for Petroleum Exporting Countries and provide alternate supplies to the West. The Russian government has promoted the country's oil-producing capacity in proposing energy partnerships both with Europe and the United States.

But Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, said, "In terms of Russia, they're producing flat out, and they have some infrastructure problems."

Ebel pointed to the restrictions of Russian pipeline capacity and the continuing feud between independent oil producers and the Russian state pipeline monopoly Transneft as limiting factors.

In what could be a classic case of bad timing, Russia's second-largest oil company Yukos said this week that it would cut production by 12 percent because of pipeline problems, the Moscow-based investment bank Troika Dialog reported. Transneft lowered its intake of Russian crude by 9 percent starting on 7 March, according to the brokerage.

Speaking of the Russian oil companies, Ebel said, "They've been somewhat successful in using river and rail to get around the pipeline problems, but there's a limit to that."

Ebel also noted that Saudi Arabia has already been pumping more than 9 million barrels of oil per day for a sustained period to offset low output in Venezuela and slim U.S. inventories. While the country can push to more than 10 million barrels per day, Ebel said there is concern about how long it can do so.

In the worst case, the image of the world's two top oil producers having so little power to raise output may be reason for worry.

Ebel said, "It doesn't give you that warm, fuzzy feeling, does it?" But in the early part of the week, world oil prices appeared to be headed down, not up, even as war with Iraq loomed.

One reason is a report that Saudi Arabia, unlike Russia, has been quietly saving up oil for a rainy day. "The New York Times" reported this week that the country has set aside 50 million barrels of oil that could cover the loss of Iraqi exports for about a month.

Fareed Mohamedi, chief economist of PFC Energy, a Washington-based consulting firm, said that Iraqi exports have already stopped, but the world market has previously "priced in" the stoppage because Iraqi production has been undependable for some time.

The extra Saudi oil is on top of the 600 million barrels in the U.S. Strategic Petroleum Reserve, as well as other stockpiles in most industrialized countries.

Mohamedi said of the new Saudi pool, "That's just sending a signal to the market, don't worry about any potential stoppages." Mohamedi believes the Saudi-Russian meeting was more likely about the risk of low oil prices rather than high ones. Both countries are concerned that the market may already be oversupplied and that prices could drop too far once the crisis subsides.

Mohamedi said, "I think the Russians may have worried that it is going down too fast." Russian officials fear that prices could plunge quickly below their target price of $25 per barrel, blowing a hole in the government's budget. The consultations with Saudi Arabia are likely to have focused on what to do after, rather than during, the war.

While gasoline prices in Western countries have climbed, crude-oil prices in the early part of the week fell from the high $30 range to the low $30 range on confidence that the U.S.-led coalition would end the uncertainty and win the war. The approach of spring in the Northern Hemisphere also ushers in the traditional drop in second-quarter oil consumption, easing price pressure.

Despite those factors, experts warn that prices could still go either way. In recent weeks, warnings of an oversupply have been balanced by a "war premium" of $5 to $6 per barrel, which could now be melting away.

Mohamedi said, "If the war goes really well, then the war premium disappears." But it could also rise suddenly in case of damage to oil fields outside Iraq.

Mohamedi said sabotage of the Iraqi fields would be a long-term concern, but the loss of supply in the short term has already been factored in. Damage to fields in Kuwait or Iran could add $10 to oil prices, he said. Destruction of the Saudi fields would be the worst case, driving prices over $60 per barrel. And Mohamedi said that if that happens, the eventual exhaustion of strategic petroleum reserves would be the market's "doomsday scenario."

www.rferl.org By Charles Recknagel

The war in Iraq will take place in the heart of the world's most important oil region and will directly affect two oil-producing states: Iraq and Kuwait. That raises fears that the war could cause an immediate surge in oil prices, among other disruptions to the global oil market. In this report from Kuwait City, RFE/RL correspondent Charles Recknagel looks at the oil stakes in the coming conflict.

Kuwait City, 19 March 2003 (RFE/RL) -- With a U.S.-led attack on Iraq likely just hours away, one of the first casualties of the impending conflict has been Iraq's oil exports.

Exports under the UN-approved "oil-for-food" program all but ended two days ago as shipping insurance companies declared a moratorium on coverage for tankers visiting Iraq's Persian Gulf terminals. The UN announced its suspension of the oil-for-food program on 17 March as part of an order to evacuate all of its staff from Iraq prior to any war.

The cut-off of Iraq's legal exports -- combined with uncertainty over how long a war will last and how much the fighting may damage Iraqi oil fields -- could fuel higher oil prices as nervous traders bid for supplies to make up the shortfall. Iraq's exports under the oil-for-food program averaged 1.7 million barrels per day last month. Baghdad is also estimated to routinely smuggle some 300,000 barrels per day to Syria, Jordan, and Turkey.

Oil experts differ on how much prices may now jump. Some analysts have predicted a surge of $5 to $6 a barrel, up from this week's price of some $33. Prices at $35 to $40 a barrel would be an additional burden for industries like airlines and automakers and put further strains on the world economy, which already is suffering from a prolonged downturn.

But other analysts believe any jump could be modest. They say today's oil prices already reflect the market's worries about supplies and that the actual onset of the war -- plus prospects for a quick U.S. victory -- may now begin easing trader tension. In one sign of what might happen, oil prices dipped to their lowest level for three months yesterday after U.S. President George W. Bush gave Iraqi President Saddam Hussein 48 hours to leave the country or face invasion.

Yet oil prices are considered almost certain to jump if the war with Baghdad causes any disruption of exports from neighboring states. The most vulnerable of these is Kuwait, whose northern oil fields are close to the Iraqi border. Kuwait's southern oil fields, like the major oil fields of Saudi Arabia and Iran, are generally considered outside the zone of conflict.

Due to fears of Iraqi missile attacks, Kuwait already has closed two of its northern oil wells, losing a total of about 35,000 barrels per day. The emirate has said it will close all of its northern oil wells if necessary, even though that would reduce its national oil production by 18 percent.

Shaykh Ahmad al-Fahed al-Jaber al-Sabah, Kuwait's information minister and acting oil minister, described the emirate's policy this way to reporters earlier this week: "Kuwait will continue with its production of oil at full capacity. Now we are between 2.3 and 2.4 [million barrels per day]. We will continue with our production even if it is necessary to close our northern wells. And if we speak about [closing] those wells in the north, that means we will continue with our capacity at 1.9 million barrels per day."

The oil minister also said that Kuwait and other members of the Organization of Petroleum Exporting Countries (OPEC) will increase production to make up for any shortfalls due to war. He said the producers' goal is to keep prices at less than $35 a barrel during the crisis. "I think that with the production here and [that of] our OPEC colleagues will always be within the average of the supplies [currently] on the market, and we will make sure there will be no shortage in the market. And we even believe the prices will be stable at $35 [a barrel] and below," al-Sabah said.

Oil analysts say that OPEC members other than Iraq have about 6 million barrels per day of unused production capacity from which to make up for the loss of Iraqi or any Kuwaiti oil. Half that excess capacity is in Saudi Arabia, with most of the rest in Kuwait and the United Arab Emirates. Non-OPEC member Russia is also considered likely to increase its exports in an effort to expand its market share.

But as OPEC states reassure the market that they will dampen any price spikes, it is far from clear how the cartel will ultimately respond to the Iraq oil crisis as it continues over the next several years.

A central question is what will happen to oil prices once Iraq resumes exporting after the conflict ends. Major foreign oil companies are eager to develop Iraq's oil fields far beyond current production levels, and U.S. officials have said they count on the oil revenues to help pay for the country's reconstruction.

Yet increased production by Iraq would drive down prices unless other OPEC members cut back production to accommodate Baghdad's revenue needs. So far, OPEC has yet to give any sign of how it would solve that problem. Major drops in prices can trigger new world financial crises, such as Russia's economic setback in the late 1990s when Moscow saw its oil revenues dramatically reduced.

Abdul-Rahman al-Humood is secretary-general of the Kuwait Economic Society. He said that Iraq's oil production capacity today is some 3 million barrels per day. Baghdad's actual output has varied widely but has rarely topped 2.5 million barrels per day due to lack of equipment and spare parts during 12 years of economic sanctions. Such output compares with some 3.5 million barrels per day in 1979, before Iraq's 1980-88 war with Iran and the 1991 Gulf War.

Al-Humood estimates that Iraq's production capacity could be increased to 8 million barrels per day if foreign companies fully invest in rehabilitating and expanding the country's oil fields. He said the increase could take three to five years to realize and will face the market with the tough challenge of absorbing an almost doubling of Baghdad's oil exports.

"If we are talking the maximum with new fields and new complete maintenance to the existing fields, let's say the maximum that they reach after three years is 8 million. That means an increase of 4 million. How will the market absorb this 4 million?" Al-Humood asked.

The Kuwaiti analyst said that as the global economy grows over the next five years, increased demand could absorb about half of the new Iraqi production without disrupting oil prices. But accommodating the rest could only be done through production cutbacks and financial sacrifices by other OPEC states if prices are to remain up.

Such production cuts have never been easy for the cartel, whose members depend on their oil revenues for most or, in some cases, all of their state budgets. The past four years have seen members mostly adhere to OPEC's production-quota system in order to bring prices up from a prolonged slump. But historically, cartel members have routinely exceeded their quotas in order to earn additional revenues and take market share from rival producers.

In one measure of the difficulties OPEC may have absorbing increased Iraqi production, al-Humood voiced a widespread Kuwaiti opinion that Saudi Arabia -- OPEC's largest producer -- should bear most of the burden. He said that much of Saudi Arabia's oil-export revenue goes into private hands, so the cutbacks would not as directly reduce the state budget as they might in other countries. "Saudi Arabia has produced more than 10 million BPD [barrels per day] maybe for 12 years. But this huge amount of production does not have an effect on their economy. And the reason for this is that huge amounts of money do not go to the government budget. Let's say 20 to 30 percent of this money goes out of the budget and into the hands of the rulers, the companies, the mediators -- you name it," he said.

Such suggestions are not likely to be welcome in Riyadh, where lines between the government budget and the private budgets of top members of the royal family are often blurred. Saudi Arabia currently is running a government budget deficit and has had to postpone some development projects to expand its narrow, oil-dependent economy. That means Riyadh is likely to look for other OPEC producers with which to share any cutbacks, severely testing the cartel's ability to cope with higher Iraqi oil exports.

Iraq is a major oil player because -- despite its low production in recent years -- it has the second-largest oil reserves in the world after Saudi Arabia. Iraq's official oil reserves are estimated at 112 billion barrels, about 40 percent of Saudi Arabia's and a little bigger than those of Kuwait. Any new Iraqi government is widely expected to remain within OPEC -- of which Baghdad was a founding member -- in an effort to maintain oil producers' ability to collectively influence world oil prices.

Oil prices have been climbing since last year, when they were around $21 a barrel. Upward pressures have included oil producer Venezuela's political crisis, U.S. government purchases of oil to build up domestic strategic reserves, and Washington's showdown with Iraq.

OPEC producers have said they believe an oil price of around $25 a barrel is an acceptable balance between producers' and consumers' needs, but maintaining that target has proved difficult in recent years