OPEC ready for oil glut - Oil cartel sees increased supply, sharply lower prices after a U.S. conflict with Iraq

money.cnn.com February 2, 2003: 1:34 PM EST

ABU DHABI, United Arab Emirates (Reuters) - OPEC is already gearing up to fend off an oil price collapse that might follow any U.S. assault on major Gulf producer Iraq.

Although world oil prices have shot well past $30 a barrel amid war fever and political turmoil in OPEC member Venezuela, key oil ministers are warning that markets could tip into oversupply during the second quarter and spark a price crash.

"If there is danger of a glut, we have to meet and rectify the situation. Definitely we (OPEC) are concerned about the second quarter," UAE Oil Minister Obaid bin Saif al-Nasseri told reporters Sunday at an energy and environment conference.

"Typically there is less demand then, and I hope this increase or the change of the ceiling won't affect it so badly."

Nasseri was referring to a decision by the Organization of the Petroleum Exporting Countries to increase supplies by 1.5 million barrels per day (bpd) to 24.5 million bpd from Feb. 1 to cover an export shortfall from strike-bound Venezuela.

Lead OPEC producer Saudi Arabia said oil markets were not starved of crude now and vowed that the cartel would keep pumping enough oil to meet its higher output limit.

"I can assure you that we, Saudi Arabia, will make sure that 24.5 million bpd is delivered," said Oil Minister Ali al-Naimi.

But higher volumes from the exporter group may only set the stage for a sharp decline in prices during the second quarter, which typically sees a seasonal drop in demand of about two million bpd due to warmer weather in the Northern Hemisphere.

"It seems everybody now is producing above the market requirements to make the market cool," said Libyan Oil Minister Abdulhafidh Zlitni. "Supplies are sufficient... and the build up of stocks will have a negative impact on prices, certainly."

Oil market analysts share the ministers' expectation of lower prices. A Reuters poll of analysts projects that world oil prices, now at two-year highs, are set to slump by $10 a barrel in the second half of the year after any war against Iraq. No panic

In the event of a military assault, OPEC President Abdullah al-Attiyah and UAE's Nasseri expected a price spike at the start of action followed by a decline when it starts to wind down.

"I believe there will be no panic. Any price spike would be brief," said Attiyah, also oil minister of Qatar. "I don't believe some analysts who say prices will reach $100, or $60."

The OPEC chief predicted a particularly grim outlook from April if exports in fellow member Venezuela are fully restored.

"If Venezuela comes back (to full capacity), we could have four million bpd or more floating," he said, adding the excess could be at least three million bpd based on its current output.

If that proves the case and "there are signs in March that prices are falling sharply," Libya's Zlitni said OPEC could reduce supplies at its March 11 meeting.

Given Washington's military preparations in the Gulf, the OPEC meeting -- which is expected to focus on the state of world stockpiles -- could take place against the backdrop of an attack on Iraq, the world's eighth-biggest oil exporter.

In a bid to calm market fears of supply disruptions, Naimi insisted Saudi Arabia would be prepared, if needed, to make use of its excess capacity, which he pegged at 2-2.5 million bpd.

Industry sources say the kingdom, the world's biggest oil exporter, is now pumping close to 9 million bpd and Naimi has made clear Riyadh can raise that to 10 million within weeks.

The Saudi oil minister said OPEC stood ready to make up for any supply shortages on its own without major consuming countries having to release their emergency stockpiles.

But the oil minister of the UAE, the only other OPEC member with substantial excess capacity, was less confident of the cartel's ability to plug a gap in Iraqi supplies. Iraq is now selling some two million bpd of crude.

"If there is total disruption to oil production in Iraq, OPEC would find it very difficult in a short period to replace that reduction of production," Nasseri said.

His assessment might spook oil dealers fretting over a potential supply crunch. Global inventories are running on the low side, particularly in the United States due to the Venezuela strike, but Saudi's Naimi said they would soon be replenished.

"With Venezuela returning and supplies steaming to the U.S., we will see a gradual build in inventories," he said.