Doubts over Opec's plan to ease oil price

news.ft.com By Carola Hoyos in Vienna Published: March 9 2003 19:39 | Last Updated: March 9 2003 19:39

The Organisation of Petroleum Exporting Countries will meet this week for what could be its last gathering before war, but doubts persist over whether the oil cartel has the ability to bring the crude price back from its historic highs before it damages the world's fragile recovery.

Oil prices have risen by almost 60 per cent since the middle of last year to nearly $40 a barrel in recent weeks - a level not seen since the 1991 Gulf war.

For Saudi Arabia, the world's largest crude supplier, Tuesday's meeting is a chance to heal the injuries to its relationship with Washington caused by the fact that 15 of the 19 hijackers on September 11 2001 were Saudis. Ali Naimi, Saudi Arabia's oil minister, may meet Paul Abraham, his US counterpart, this week to discuss how best to tackle the oil price.

"This is Opec's time to shine and especially Saudi Arabia's," says Raad Alkadiri, analyst at PFC Energy, a Washington consulting firm. "It is the moment to remind the US just what a strategic asset [the kingdom] is in terms of the oil market."

But Saudi Arabia's ability to halt rising oil prices has proved limited. Analysts and officials in the main consuming nations question whether the kingdom and its nine Opec brethren have much spare crude to offer the famished market. In January, Opec raised members' output ceiling to 24.5m barrels a day in response to a shortage caused by the general strike in Venezuela, where exports continue to be disrupted. But the supplies Opec subsequently added to the market have done little to stop the climb in prices.

This time Opec may consider temporarily suspending its output limit altogether, but that will do little if the group is about to reach its maximum capacity.

Kuwait could add to the current shortfall in the market by halting as much as 700,000 barrels a day of its production as it shuts down fields to protect them from potential Iraqi sabotage.

Neither Kuwait nor Iraq's oil ministers will be at the meeting, it was revealed yesterday, as both countries prepare for a possible US invasion of Iraq.

A sign of Opec's exasperation with the rise in oil prices - much of which the oil ministers blame on the psychological effect of Washington's war drums - is the fact that the group this week will not bother to wait for the latest report on world oil demand and supply before making its decision, says Adam Sieminski, analyst at Deutsche Bank.

"It is an indication of the likelihood that fundamentals will not play a role in this decision that the ministers are meeting the day before the data release," he said. The most powerful of those statistics is the massive decline in commercial oil inventories - especially in the US.

Stocks have been hit by the cold winter and shortages created by the Venezuelan strike, reaching a level at which the industry's distribution network is at risk of faltering.

To counter that, the world still has strategic stockpiles of oil in leading consuming nations. Japan, the US and Europe have built up their stockpiles to 1.2bn barrels. Analysts say the release of some of that oil as soon as war starts d day will be critical.

But governments are not responsive to the market in timing the release of those stocks. After Iraq invaded Kuwait in 1990, the officials who decide the timing and volume of the release acted two months too late.

Instead of helping to settle the price, when initially went to more than $40 a barrel, the decision eventually pushed oil below $15, because in the meantime Saudi Arabia had increased its production. It is an outcome Opec does not want repeated.

The cartel will do everything in its power on Tuesday to reassure the market that it will not suffer a shortage if the US goes to war while discussing with Mr Abrahams how best to return prices to the preferred $22-$28 a barrel level.