WRAP: OPEC Tackles Venezuela Shortfall With Eye On Iraq

sg.biz.yahoo.com Monday January 13, 4:13 AM By Fred Pals Of DOW JONES NEWSWIRES

VIENNA (Dow Jones)--Dealing with Venezuela right now but with Iraq in the background, OPEC at its extraordinary meeting in Vienna Sunday settled for a hike of its output ceiling by 1.5 million barrels a day to 24.5 million b/d, effective from Feb. 1.

ADVERTISEMENT And while the Organization of Petroleum Exporting Countries hopes supplies by strike-wracked Venezuela will gradually normalize and a U.S.-led war against Iraq won't materialize soon, the bottom-line is that OPEC wants the message out that it will make up for any loss caused by the Venezuelan crisis, analysts said.

On paper, Venezuela saved face with its new quota level under the terms of the pro rata hike across OPEC's 10 members, excluding Iraq. But it won't be able to meet its quota of 2.82 million b/d anytime soon.

"The deal is a nice finesse. It allows OPEC to make up for any shortfall and leaves Venezuela with the opportunity to say it is breaking a strike because it got a new quota," Raad Alkadiri, energy analyst at the Petroleum Finance Co. in Washington, said. It also avoids the troublesome issue of adjusting individual quota levels, Alkadiri added.

OPEC President Abdullah bin Hamad Al Attiyah added at the concluding press conference: "We have told Venezuela we won't take its market share."

Sunday's decision, he said, was aimed at ensuring "adequate supplies of crude to consumers and to restore balanced market conditions."

OPEC kingpin Saudi Arabia sided with the majority, although it had expressed earlier Sunday its concern of "flooding the market" if the ceiling was hiked. Sources hinted it had earlier sought an output rise divided between nine members, excluding Venezuela and Iraq, without changing the quotas.

Oil Prices Will Slip But Not By Much -Analysts

Given Venezuela's domestic crisis, most OPEC members think its supply won't return to its pre-strike 3 million b/d level any time soon. Venezuelan Oil Minister Rafael Ramirez and the head of state-run Venezuelan oil company Petroleos de Venezuela (E.PVZ), or PdVSA, Ali Rodriguez - a former OPEC President - set out to convince their colleagues that production of 2.5 million b/d would be reached in the country by mid-February. Al Attiyah just "hoped" Venezuela would reach that level. Venezuela, he said, was producing about 700,000 b/d currently.

Analysts have said it will take PdVSA months to get to 2.5 million b/d. A nationwide strike - which enters its seventh week Monday and is aimed at ousting President Hugo Chavez - has crippled operations at the oil giant and slashed production and exports to less than a third of their usual levels.

But despite OPEC's pledge to make up for any shortage caused by Venezuela, the prospect of war between the U.S. and Iraq means world oil prices won't come down much on Sunday's decision, analysts see. "I think it is dawning that war is to happen and prices will ease a bit but not a lot," Alkadiri said.

Yasser Elguindi, analyst with Medley Global Advisors in New York, agrees: "The market will take its time to let the message sink in there will be new barrels on the market. But prices won't ease significantly."

If a war against Iraq starts, a renewed OPEC pledge to make up for Iraqi shortfall, a timely release of U.S. strategic petroleum reserves and a seasonal downturn in consumption starting in the second quarter could quickly bring any price spikes under control, analysts said. Al-Attiyah made it clear that OPEC would meet in the event of war.

OPEC, he added, had more than 4 million b/d of spare capacity it could draw on if necessary. Iraqi production has been seen at slightly more than 2 million b/d. Global demand for OPEC output is seen at around 25 million b/d.

The issue from Monday, however, will be whether the crude oil price falls once the markets open. Many analysts say the move is, as so often the case at OPEC meetings, largely symbolic. That hike looks impressive on paper, yet much of it is accounted for by OPEC's rising pool of quota-busting.

If analysts are proven right over the next couple of months and oil prices remain stubbornly high, then this weekend's emergency meeting will, arguably, have failed to achieve OPEC's immediate goals.

OPEC's next regularly scheduled meeting is slated for March 11.

-By Fred Pals, Dow Jones Newswires; 0043-664-5446851; fred.pals.dowjones.com