OPEC to Review Oil Output As War Looms; members already pumping near full capacity

www.wilmingtonstar.com Last changed: March 09. 2003 4:11PM By BRUCE STANLEY AP Business Writer

Whatever OPEC decides to do this week, its representatives won't have their usual influence on oil prices when they meet to review the group's output quotas for crude, analysts say. Members of the Organization of Petroleum Exporting Countries are already pumping at or near their full production capacity, as worsening fears of a U.S.-led war on Iraq have pushed prices to 12-year highs. A conflict would almost certainly cut off Iraq's crude exports, currently totaling about 2 million barrels a day. With Venezuela's oil exports still recovering from a strike, OPEC would be hard-pressed also to cover a shortfall in Iraqi shipments. "That's one of the reasons now why the market is so incredibly nervous," said Orrin Middleton, an energy analyst at Barclays Capital. "The real problem is how much can OPEC really do?" OPEC supplies about a third of the world's oil, but some analysts estimate it has only 1.4 million barrels a day in readily available spare capacity. The United States and other large importing countries are now coordinating plans to tap into their strategic petroleum reserves as the ultimate cushion against a major supply disruption, should fighting erupt in Iraq. OPEC, whose delegates meet on Tuesday in Vienna, Austria, can help by suspending its formal production quotas and producing flat out. But at the moment, analysts say international politics has robbed the cartel of much of its influence. "For once OPEC is in the back seat, looking out the window. The U.S. is in the front seat, driving the war wagon," said Leo Drollas, chief economist at the Center for Global Energy Studies. When OPEC oil ministers last met two months ago, they decided to increase the group's production target by 6.5 percent to 24.5 million barrels a day, in the hope of keeping prices at or below $28 a barrel. Prices have climbed steadily since then. On Feb. 27, futures contracts of U.S. light, sweet crude spiked to a post-Gulf War high of $39.99 a barrel in New York. April contracts of U.S. crude were trading Friday at $37.30 a barrel, while Brent futures for April delivery were at $33.75 in London. OPEC's members are cashing in on these high prices by pumping well above their official quotas. In February, the group's 10 members excluding Iraq produced 24.7 million barrels a day, according to a Dow Jones Newswires survey. Iraq doesn't participate in OPEC's production agreements because the United Nations oversees its exports. Energy Secretary Spencer Abraham and Claude Mandil, executive director of the International Energy Agency, expressed gratitude Friday for OPEC's willingness to bust its own quotas. The agency is the energy watchdog for the Organization for Economic Cooperation and Development, a club of rich oil-importing nations. "The U.S. government and IEA appreciate the actions of producer nations, which have already increased production to mitigate the effects of the Venezuelan disruption," Abraham and Mandil said in a joint communique issued at the agency's headquarters in Paris. "In light of tight markets, we also appreciate producers' willingness to increase production if necessary to address any further supply disruption." Mandil has consulted recently with officials at OPEC's headquarters in Vienna, in a sign of closer cooperation between importing countries and the cartel. Abraham planned to visit the city Tuesday on separate business and indicated that he might seek talks with key oil ministers. Some analysts suggested that major importers and OPEC - two often adversarial camps - might be hatching a deal aimed at heading off a war-induced disruption in supply. "This is not a time for volume control. This is a moment for OPEC to be a good global citizen," said Peter Gignoux, managing director of the petroleum desk at Salomon Smith Barney. OPEC, led by Saudi Arabia, dreads a release of crude from importers' strategic reserves because such a step would reduce the cartel's control over supplies. After meeting with Mandil on Thursday, Saudi Arabian Oil Minister Ali Naimi said that the IEA agreed producers should exhaust their spare capacity before importing countries resort to tapping into their reserves, OPEC's news service reported. Mandil and Abraham appeared to confirm this joint strategy. Washington and its IEA partners "reaffirmed their commitment to make additional volumes of oil available to the market to reinforce producers' efforts if needed," they said. IEA countries have 4 billion barrels of strategic crude reserves. The United States accounts for 600 million barrels of that total, enough to cover 39 days of imports in case of a complete halt in foreign supplies. Some analysts urged importing countries to release oil from their reserves even before a war, to forestall a supply shortage or another spike in prices. "In fact they should do it now," Drollas said, "before anything happens, because it takes time for the stuff to come through the system."