OPEC to Weigh Options Amid Looming War

www.riyadhdaily.com.sa Economy   Monday - 10 March 2003 The Organisation of Petroleum Exporting Countries (OPEC) meets in Vienna on Tuesday to weigh its options amid the looming threat of war in Iraq, high oil prices and slumping oil inventories. The cartel will also "see what measures are needed to offset a shortage if there is a military strike in Iraq", an OPEC source said on Friday. Although production quotas are expected to be in the focus, however, analysts said OPEC will have little room for maneuver at its latest quarterly conference on output policy, given that spare production capacity is relatively small. "With oil storage levels still sitting well under normal, crude prices well over 30 dollars ... and the cartel’s spare capacity limited almost entirely to just Saudi Arabia, production quotas have effectively been suspended," said a research note by Merrill Lynch director of energy research Michael Rothman. Analyst George Beranek at PFC Energy, a Washington-based consulting group, also noted the divergence between quotas and actual production. "Production is what the market looks for, so at the moment any change in quotas would have little effect," he said. "The question is, do they just agree to disregard the quotas, or formally suspend them?" The price of benchmark Brent crude has soared more than 10 dollars since mid-November-a rise of over 40 percent-as a crippling 63-day strike choked off Venezuela’s output and traders speculated on the prospects of rising prices resulting from any war with Iraq. OPEC raised its collective output quota from 21.7 million barrels per day to 23.0 milloin bpd in January, and again to 24.5 milloin bpd in February, in a bid to rein in prices. But the quota hikes had little impact, partly because actual output by the group’s members already exceeded the quotas, analysts said. OPEC’s stated aim is to keep oil prices-based on a basket of seven crudes-within in a range of 22 to 28 dollars per barrel. But the price of OPEC’s basket has stayed well above the cartel’s upper target of 28 dollars a barrel since mid-December 2002, while US reference light sweet crude recently hit a 12-year high of almost 40 dollars in New York. With a possible war threatening to cut off Iraq’s output of 2-2.5 million bpd, attentions have turned to the ability of other producers to make up any shortfall. But most member countries are already pumping at or near capacity, leaving only OPEC giant Saudi Arabia in a position to boost production significantly, having already increased output from just over eight million bpd in December to 8.95 million bpd last month, according to industry estimates. Lawrence Eagles, an analyst at brokerage GNI-Man Financial said the latest survey of OPEC production pegged output including Iraq at 27.21 million bpd, up 1.56 million bpd since January. The US Department of Energy estimates that OPEC countries excluding Iraq and Venezuela hold between 2.1 and 2.5 mln bpd of excess oil production capacity that could be brought online. "This is the second lowest spare capacity level in the past three decades, trailing only the low reached in 1991 after the loss of Iraqi and Kuwaiti production," it said in a study published last Thursday. But analysts said the group is likely to continue ascribing current high oil prices to speculation about war with Iraq, rather than to extremely low global oil inventories. "We suspect that there will be some commentary that current crude prices are largely a function of factors ‘beyond OPEC’s control’, such as speculation about supply security because of a war against Iraq," Merrill Lynch’s Rothman said.