Iraq Driving Bush Admin's New Tack With OPEC -Analysts

sg.biz.yahoo.com By Campion Walsh Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Iraq is why President George W. Bush's administration took the unusual step this week of publicly asking the Organization of Petroleum Exporting Countries for more oil, industry analysts said.

ADVERTISEMENT While the Bush administration is worried by reduced oil supply due to strikes in Venezuela, it's the prospect of war with Iraq and a suspension of some of the Persian Gulf country's 2.4 million barrels a day of production that led the State Department to say publicly Wednesday it would be positive for OPEC to deliver more oil.

"It's all part of the psychological warfare, if you will," said Fadel Gheit, oil analyst for investment bank Fahnestock & Co. The Bush administration is effectively saying, "Saddam is not going to get away with anything ... and sending a message to the oil markets and the world not to panic," Gheit said.

Analysts say the U.S. strategy effectively divides responsibilities for the two international issues preoccupying oil traders.

Under this scenario OPEC will address the steep drop in Venezuelan oil production since early December from its previous rate of nearly 2.6 million barrels a day; while the U.S. government's strategic petroleum reserve and other emergency stockpiles will be used if war breaks out in Iraq.

"The last thing (Bush administration officials) want during a war with Iraq is for another significant OPEC exporter to be off-line the way Venezuela is now," said Aaron Brady, oil analyst at Wakefield, Mass.-based Energy Security Analysis Inc.

Releasing crude now from the 599-million-barrel SPR would bring crude oil prices down, but it could also cause alarm in light of the Bush administration's policy of only using SPR crude for international supply emergencies, analysts said. Bush and Vice President Dick Cheney pointedly criticized President Bill Clinton for tapping the reserve in non-emergency situations, and they're trying to set the bar high for situations that do warrant a release, analysts said.

OPEC Likely Wasn't Audience For State Department Remarks

While OPEC's emergency meeting Sunday in Vienna is expected to yield a significant production increase, the group's long-running production above quota has already helped to cushion some of the shortage from the Venezuela strikes, now in the fifth week.

Additional oil supply as a result of the meeting may serve as much to address market concerns about Iraq as it does the physical shortfall from Venezuela, said Vahan Zanoyan, president of the Washington-based consultancy Petroleum Finance Co.

"I would find it hard to believe that this is just about Venezuela," Zanoyan said. "By the time an OPEC increase arrives it will be mid- to late-February, and by then we're almost entering the routine maintenance period when refineries don't really need as much crude."

Many refineries shut down around March to conduct routine maintenance and to adjust operations to produce more gasoline for the summer driving season. The shutdowns, which can last several weeks, reduce crude demand.

Analysts said OPEC didn't need private or public prodding from the State Department this week to see it's in its own interest to boost production when crude oil prices rise above $30 a barrel for a sustained period, as the front-month New York Mercantile Exchange futures contract has since mid-December.

State Department spokesman Richard Boucher's comment that it would be "positive" for OPEC to raise supply was probably meant to calm markets and the general public, rather than to influence Saudi Arabia or any other members of the oil-exporters' group, they said.

"This could be in part in preparation for anticipated conflict in Iraq, either destruction from the war or its psychological effect," Zanoyan said.

Gheit of Fahnestock & Co. said the U.S. may be taking a third precaution for the oil-market impact of a potential war in Iraq, beyond releasing crude from the SPR or calling on OPEC for emergency supply. The U.S. military may be stockpiling oil beyond the scope of data-collection agencies and market reporters, he said.

"There has been hoarding by governments including ours off the books," Gheit said, suggesting various military facilities and vessels outside the scope of commercial analysis could be storing oil beyond what would be needed for a successful war against Iraq.

While Iraq is the main issue, Venezuela has been a contributing factor in the Bush administration's public expressions of concern about the market, analysts said. The strikes have reduced world supplies by more than 75 million barrels so far, and the U.S. Energy Department's Energy Information Administration said Wednesday it may take until June to get Venezuela's output back to normal even if the strikes are resolved in February.

The Energy Department has deferred winter delivery of nearly 11 million barrels of crude to the SPR, freeing the oil up for use by refiners. And Energy Secretary Spencer Abraham has said he's monitoring the situation in Venezuela closely.

-By Campion Walsh, Dow Jones Newswires; 1-202-862-9291; campion.walsh@dowjones.com