Opec lifeline for the west - Oil cartel expands output but market is still tight

www.guardian.co.uk Mark Milner and Charlotte Denny Monday January 13, 2003 The Guardian

The Organisation of Petroleum Exporting Countries last night handed a lifeline to the struggling global economy with a deal to raise output and keep a lid on the oil price.

The producers' cartel agreed to increase production by about 1.5m barrels a day at an emergency meeting held in Vienna yesterday - an increase of 7%.

"We hope the agreement will produce a reasonable price for consumers and send a very strong message to the market to prevent panic," Opec president Abdullah al-Attiyah said after the deal was announced.

With the oil price over $30 a barrel as a result of fears of a US-led attack on Iraq and the long-running strike in Venezuela which has disrupted supplies from the world's fifth-largest oil exporter, markets had been watching keenly for a deal.

"Opec has proved responsive, and that's good news for the world economy," said Peter Gignoux at investment bank Salomon Schroder.

Although the agreement - which was at the top end of expectations - will ease the pressure, analysts noted that the promised increase is below the estimated 2m barrels a day shortfall caused by the problems in Venezuela.

The deal to raise output levels will bring relief to both global economic policymakers and motorists.

Petrol pump prices are not directly linked to the spot market price of oil, but a sustained movement in the price does eventually feed through to garage forecourts.

With the world's leading economies struggling for growth there had been concern that a sharp increase in the oil price could stall the global financial system.

Opec's position is crucial, because although it accounts for less than half global oil output most of the world's spare capacity lies within its ranks, particularly in Saudi Arabia.

The cartel has effectively acknowledged for some time that higher prices and a corresponding downturn in the global economy are not in its own best interests. It has set a target range of between $22 and $28 a barrel, well below the $33 seen recently.

Saudi oil minister Ali al-Naimi played down supply concerns, saying: "There is no shortage. We never allowed the shortage to take place."

The Saudi minister said that his country would able to raise output to 10m barrels a day - about 2m above the average for December - within two weeks, although maintaining production at a higher level would take longer.

However, the Opec production agreement does not mean that prices are likely to fall back sharply in the short term.

An assault on Iraq would cut global production by about 2m barrels a day, and it is far from clear how soon Venezuela will be able restore pre-strike output levels.

Although the country's oil minister says that output is still running at 800,000 barrels a day and could be back to 2.5m barrels by the middle of next month, many analysts believe that his views are overly optimistic.

"The oil market is still tight," says Gary Ross, chief executive of the American consultancy, Pira Energy.

"This [deal] will provide some relief, but the extra will not arrive until the end of the first quarter."