Oil: Prices retreat from two-year high as more supply seen

07.01.2003

LONDON - World oil prices pulled back from two-year highs on Monday (GMT) when big producing countries came out in favour of a hefty output hike to cover lost supplies from Venezuela, where a strike entered its sixth week.

Kuwait and Russia said oil powers should release up to 1.5 million barrels per day (bpd) of extra supply to cool the rally that has lifted prices by a quarter in two months.

International benchmark Brent crude oil fell 22 cents to US$30.55 a barrel, while US crude futures dropped 65 cents to US$32.43. Both markers are within US$2 of two-year highs and have already caused pump price hikes in the West.

"Prices are off after a big rise during Christmas and New Year," said Richard Savage of Bank of America. "With uncertainty over the Venezuelan strike and Opec's response, I would expect volatile trade over the next few days."

The strike in Venezuela, aimed at toppling President Hugo Chavez, has withdrawn more than two million barrels per day from world markets and drained US stockpiles to near their lowest levels in 26 years.

Russian Energy Minister Igor Yusufov, in Kuwait on a tour of Gulf oil states, saw the need for one to 1.5 million bpd of extra oil on world markets.

Kuwaiti Oil Minister Sheikh Ahmad al-Fahd al-Sabah echoed this estimate.

"Opec could do one to 1.5 million (bpd of extra output) and hopefully non-Opec can contribute some of that," Sheikh Ahmad told Reuters.

Russia, Norway and Mexico are the three largest oil exporters outside Opec, which is dominated by Gulf states, but all three are already pumping close to full capacity.

Opec President Abdullah al-Attiyah said that the 11-member group was determined to use an informal mechanism to trigger a supply hike by January 15 if prices stay up.

Attiyah said consultations were continuing about the volume of any output hike.

Opec's mechanism is designed to keep its reference basket of crudes in a range of US$22-US$28 a barrel but the basket stood at US$30.83 on Friday.

Asked if Russia had any spare capacity and whether it would be willing to raise output, Yusufov said: "We would prefer not to because we have certain programmes scheduled, but we are ready to raise production if necessary."

Extra supply from Opec, which controls two-thirds of world exports, would go some way to cooling prices, but traders said markets were unlikely to fall heavily until the threat of war on Iraq subsided.

The Bush administration is putting together a plan for a post-Saddam Hussein Iraq that would involve an extended American military presence and use of oil revenues to feed the people, Washington officials said on Monday. Reuters

• REUTERS