OPEC likely to suspend quotas for war, not before

www.forbes.com Reuters, 02.28.03, 6:21 AM ET By Tanya Pang and Peg Mackey

SINGAPORE/DUBAI Feb 28 (Reuters) - OPEC is likely to establish a war contingency plan at its March 11 meeting that would suspend oil output quotas once hostilities start, senior officials and OPEC sources said on Friday. But the producer group that dominates world oil trade is very unlikely to lift output restrictions simply to contain prices before the meeting, they said. "The price now is not due to any shortage or fundamentals, its psychological," said one. While no formal proposal is yet in circulation, the sources said ministers are expected to put a plan in place for a temporary suspension of output limits at the Vienna gathering in two weeks' time. "There is no proposal for this yet," Indonesian Energy Minister Purnomo Yusgiantoro told Reuters on Friday. "But people are fully prepared to make up the production if there is no Iraqi oil." OPEC sources said the group probably would leave formal output limits unchanged at 24.5 million barrels per day (bpd) and prepare to suspend limits altogether if war erupts. Also an option is the immediate suspension of quotas at the March 11 gathering in a bid to calm prices in the final days before any war. Despite two production increases in the past two months, the cartel was powerless on Thursday to prevent prices spiking to a 12-year high of nearly $40 a barrel for U.S. crude. Speculators pushed prices to post-Gulf War highs as the run-up to military action against Iraq coincided with a slump in inventories of crude and products in the United States during a bout of very cold winter weather. U.S. crude on Friday traded at $37.36, up 16 cents. OPEC's March meeting, scheduled months ago, comes just days before Britain and the United States hope for a vote on a second resolution at the United Nations authorising war on Iraq. Some in the group with no spare capacity are reluctant to give free rein to Saudi Arabia, the only country with significant volumes of unused capacity. But all will want to avoid the need for a release of consumer country strategic stocks, controlled by the Paris-based International Energy Agency. The IEA, along with its most powerful member the United States, has said it will give OPEC the chance to fill any Iraqi stoppage. The group is already stretched, compensating for shortages from strike-hit Venezuela. Both the IEA and the U.S. Department of Energy have said they will wait to judge whether OPEC can handle an outage in war before they decide to release emergency reserves. Washington has the right to release reserves unilaterally from the stocks it holds above the 90-day minimum of forward supply required by IEA rules. The vast U.S. Strategic Petroleum Reserve holds about another 50 days of supply. Even with a free-for-all, OPEC does not have much extra oil to deliver -- little more than Iraq's 1.7 million bpd of exports. With only Saudi Arabia having access to significant extra volumes, actual cartel supplies will depend on how much more Riyadh decides to pump. Many independent analysts estimate the Saudis are already producing a million barrels a day more than their official 7.96 million bpd quota. That leaves it with 1.5 million bpd to spare, with the UAE able to call on a few hundred thousand barrels a day.