OPEC Spare Capacity Squeeze as War Looms

reuters.com Thu March 6, 2003 07:47 AM ET By Peg Mackey

DUBAI (Reuters) - As war clouds darken over Iraq, oil markets are obsessing over whether or not OPEC is able to cover a supply crunch and prevent the need for consumer countries to tap emergency strategic reserves.

Optimists say the producer group will be able to shoulder the supply burden alone because the world's thirst for oil will ease during spring.

"OPEC will have more than enough capacity to cover a loss in Iraqi exports plus a small outage in Kuwaiti supplies," said Gary Ross of New York consultancy PIRA Energy.

"That's because the excess capacity of Saudi Arabia and the UAE will combine with a seasonal decline in oil demand of 2-2.5 million barrels per day in the second quarter."

Pessimists, however, say oil markets will remain unconvinced in the stressful early days of battle.

And world consumers have cause for concern if they look only at the spare capacity figures of the Organization of the Petroleum Exporting Countries.

Two output increases this year to cover shortages from strike-hit Venezuela have left the cartel with a cushion of just two million bpd, a Reuters survey estimates. That is just enough to cover a break in Iraqi oil exports.

"OPEC is very close to its immediate full capacity," said Leo Drollas of London's Center for Global Energy Studies (CGES).

"And if Kuwait shuts its northern fields they may not have more than one million bpd to put on the market to cover for Iraq -- and that is not enough."

Iraq's Gulf neighbor Kuwait has said it could shut up to a third of its 2.1 million bpd of output as a safety precaution when the bombs start dropping.

STRATEGIC RESERVES

That stoppage would make it more difficult for OPEC to handle a shortage and make more likely the release of emergency reserves held by industrialized importers.

If OPEC has insufficient spare, those countries, represented by the Paris-based International Energy Agency (IEA), have said they will release crude from strategic inventories for the first time since the 1991 Gulf War.

"The IEA should release oil to prevent prices spiking," said Drollas. "They should have done it when Venezuelan exports were interrupted. And if they don't do it with Iraq, they should disband the IEA."

OPEC is doing its utmost to avoid a repeat of the Gulf War when the IEA released crude to coincide with the allied attack on Iraq, triggering a huge drop in oil prices.

Cartel officials have vowed the group will pump flat out if a war halts Iraqi exports. The head of the IEA, Claude Mandil, has met with Saudi Oil Minister Ali al-Naimi and OPEC Secretary-General Alvaro Silva.

Saudi Arabia will press OPEC, at a meeting next week, to set up a contingency for war that would suspend output quotas once hostilities start.

The only OPEC producer with any significant spare capacity it will be down to Riyadh to determine how many extra barrels are released into world markets.

Saudi Oil Minister Ali al-Naimi has said the kingdom is able to boost flows to 10 million bpd and can sustain maximum capacity of 10.5 million bpd within months.

"It has never been a problem to get to 10 million bpd. We've been there before," said a senior Saudi oil executive. "And pumping beyond that is within the range of our production capacity."

The Saudi executive said much of the kingdom's spare volume is located offshore in the northern Gulf fields of Zuluf, which pumps Arab Medium, and Safaniyah, which produces Arab Heavy.

Several other fields could also be tapped for extra oil.

The kingdom, the world's biggest oil exporter, now is pumping at just over nine million bpd, insiders say.