OPEC to Open Taps to Control Price Spike

www.sunherald.com Posted on Sat, Jan. 11, 2003 BY MICHAEL GEORGY AND ANDREW MITCHELL Reuters

VIENNA - OPEC producers prepared on Saturday for emergency talks that will decide how far to open the oil taps to prevent a price shock as war looms in Iraq.

Cartel ministers, meeting at 6:30 a.m. EST on Sunday, must also plug a gap in supplies from the group's third biggest producer Venezuela, hit by a six-week-old general strike.

Arriving in Vienna, influential Saudi Oil Minister Ali al-Naimi sent a strong message to world oil markets, where prices recently hit a two-year high, above $33 a barrel, for U.S. crude.

"There is a shortage. It is significant," said Naimi of the Venezuelan outage. "I can assure you that there will be no shortage." He predicted that oil prices "will be lower" after Sunday's meeting.

OPEC is under pressure from the United States to stop prices running out of control ahead of a possible U.S. attack against Baghdad, that some fear could be just weeks away.

Washington is worried that sluggish economic growth, having failed to respond to a series of interest rate cuts, could be snuffed out by another jump in energy costs.

"With oil stocks in the United States already close to estimated minimum operating levels, OPEC has been forced to act," said Washington's Petroleum Finance Company.

"The combination of the twin disruption scenarios represents a political nightmare of sorts for OPEC, which will be accused of having failed its mission if prices climb above $35 a barrel."

U.S. Energy Secretary Spencer Abraham, who normally avoids making public comment on OPEC, said on Friday he had been in contact with producers. He said they were readying a "substantial increase."

HOW MUCH?

Ministers must judge the volume of additional crude required to contain prices inside their preferred $22-$28 target range.

Kuwaiti Oil Minister Sheikh Ahmad al-Fahd al-Sabah has said the group is discussing a rise of 1.0-1.5 million barrels a day, up 4-7 percent on limits now of 23 million bpd.

Saudi Arabia, in control of most of the world's spare production capacity, wants an increase at the top end of the range.

Others including the UAE, Iran, Algeria and Libya are fearful that an end to the Venezuelan strike could push prices sharply lower and prefer just one million barrels daily.

Whatever the formal decision, Saudi is likely to raise flows by as much as it thinks is necessary for keeping crude under $30 -- to smooth diplomatic relations with Washington and prevent accusations in the Arab world that it is benefiting from war.

Riyadh sees its long-term interest in keeping prices under control to foster the world economic growth that fuels demand for its oil.

Already Saudi customers and shippers report preparations for extra deliveries, particularly to the United States, which relies on Venezuela for 13 percent of its imports.

Sunday's meeting will have to address the delicate issue of how to divide additional supply allocations.

Some want Venezuela excluded from a new deal, leaving nine members of OPEC to share out the incremental supply, giving those with spare capacity greater license to lift production.

Caracas is sending a powerful delegation headed by Oil Minister Rafael Ramirez and state oil company head Ali Rodriguez to argue against that strategy. It does not want to see its share of the OPEC pie shrink now for fear it fails to recover its full stake in the future.

Venezuela is expected to get backing for a request that new quotas be given temporary status, making it clear that previous limits be restored once its output recovers.