OPEC acts to raise oil output to cap prices

www.iht.com Eric Pfanner International Herald Tribune Monday, January 13, 2003

Strikes in Venezuela a concern as cartel seeks to assure flow   VIENNA The Organization of Petroleum Exporting Countries agreed Sunday to increase its official production quota in an effort to ease concern over tight global oil supplies and keep a lid on rising prices.

In an emergency meeting here, called to address the effects of anti-government strikes in Venezuela that have cut off most of that country's oil production, members of the cartel agreed to raise their total output quota to 24.5 million barrels a day as of Feb. 1. "OPEC is trying to send a very strong message that it is doing the utmost to ensure adequate supplies," said Abdullah Hamad Attiyah, the OPEC president and Qatari oil minister.

Though the new quota represents an increase of 6.5 percent from the 23 million barrel level set only a month ago, industry analysts said the actual amount of new oil that enters the market may be smaller, meaning any downward effect on prices could be muted. That is because the cartel's sensitive politics required every member to get a proportionately higher share of the quota, even though Venezuela's production will remain only a fraction of its official quota until strike-damaged facilities are repaired.

The only way that OPEC, which pumps about one-third of the world's oil, will be able to make up for Venezuela's lost share in the short term is if other members produce above their set limits, analysts said. In December, total OPEC production fell short of the 23 million barrel limit by several hundred thousand barrels.

OPEC had sought to stamp out so-called quota cheating at its December meeting, when it raised the official quota from 21.7 million barrels per day. But since then, the strikes in Venezuela against the government of President Hugo Chavez, along with concerns about a possible war in Iraq, have pushed prices sharply higher, throwing a wrench into those plans. On Friday, crude oil for February delivery on the New York Mercantile Exchange closed at $31.68 a barrel, down 31 cents from the previous day but still nearly 31 percent above its November low.

"It's hard to put Humpty Dumpty back together again," said Gary Ross, chief executive of the PIRA Energy Group, referring to the effort to clamp down on quota cheating.

Analysts said the increase in the overall quota suggests that OPEC members that can pump more oil - only Saudi Arabia and the United Arab Emirates have significant spare capacity - will do so to some extent, even if their individual quotas are rising only marginally. Saudi Arabia's official level, for instance, rises to 7.96 million barrels per day from 7.48 million, but analysts say it could produce as much as 10 million barrels.

"There is no shortage. We never allowed the shortage to take place," said Ali Naimi, the Saudi oil minister. "There is a significant shortage from Venezuela, but there is no shortage in the international market."

If the official outcome of the meeting was less important than the reality of what happens in the market, then why would OPEC ministers gather in frigid Vienna - the city was blanketed in snow - only one month after their last regular meeting? Appearances matter a great deal, too. Analysts said Saudi Arabia, in particular, was eager to be seen as cooperative at a time when many American conservatives are raising questions about the Saudi commitment to fighting terrorism.

Unusually high oil prices are also not in Saudi Arabia's interest if they contribute to a slowdown in the global economy and thus lower demand for the country's oil reserves.

"They are trying to paint OPEC in a good light," said Leonidas Drollas, chief economist with the Center for Global Energy Studies in London. "The Saudis are trying to ingratiate themselves a bit with the United States."

But OPEC also emphasized that the increase in quotas may be temporary. If Venezuelan production returns to pre-strike levels and a war with Iraq is averted, for instance, the cartel might be faced with a price-depressing oil glut just as seasonal demand wanes in spring.

"We will look very closely at the market and we will continue our consultation," Attiyah said.

The OPEC president said the he had faced no pressure from the United States, the world's largest oil consumer, to do something about rising prices, but hinted that the possibility of a war in Iraq had figured in OPEC's discussions.

"We take all the factors into consideration in determining whether there is a shortage in the market," he said.

Iraq, which is nominally an OPEC member but outside the group's quotas because its production is monitored by the United Nations, stepped in to fill some of the gaps left by the loss of Venezuelan output. Over the last few weeks it has been producing about 2 million barrels a day, Drollas said.

The increased output from Iraq and quota cheating by other OPEC members probably accounts for the fact that U.S. petroleum stockpiles were above predicted levels in the week ending Jan. 3, actually rising by one estimate and falling less than expected by another. Though total OPEC production fell slightly short of the 23 million quota, the relative adequacy of supply helped push down futures prices slightly last week.

Though OPEC insists that it has enough spare capacity to make up for all of the lost production from Venezuela, a war in Iraq could upset the fragile supply-demand balance.

In the event of a war, analysts say the International Energy Agency would probably release some oil from its strategic reserves, held by 26 member nations. And the United States could tap its own Strategic Petroleum Reserve, as President Bill Clinton did in 2000 when prices spiraled.