War drums are beating - Oil prices soar despite OPEC reassurances

www.middle-east-online.com First Published 2003-03-10, Last Updated 2003-03-10 17:04:46 By Perrine Faye - LONDON

Escalating war worries drive boil prices to new two and half year high despite OPEC's efforts to calm oil market.

Oil prices nosed higher in early trading here on Monday as war worries escalated at the start of a crucial week in the Iraq crisis and efforts by OPEC energy ministers to try to calm the market fell on deaf ears.

The price of a barrel of benchmark Brent North Sea crude oil for April delivery climbed to a new two and a half year high of 34.55 dollars, before easing back to 34.15 dollars, up five cents from the previous close.

In New York, the reference light sweet crude April-dated futures contract shot up 78 cents to 37.78 dollars a barrel on Friday.

Prices resumed their upswing as the UN Security Council prepared to debate a vote on a US-British resolution giving Baghdad until March 17 to disarm or face war, as France wooed opposition among African states.

Washington warned it could launch strikes before next Monday's deadline if the United Nations rejected the resolution.

"It looks as if it could be a very strong week for crudes and the products as war fears mount," said GNI-Man Financial analyst Lawrence Eagles

"Iraq will continue to dominate market talk, especially as it would appear as if the US will have to go to war without a UN mandate," he added.

Jittery oil traders found little solace in remarks from oil ministers attending a meeting of the Organisation of Petroleum Exporting Countries (OPEC) in Vienna to discuss production quotas.

Venezuela and Algeria, two members of the 11-strong cartel, said they believed OPEC had enough room for manoeuvre to avoid a supply shortage in the event of war.

But UAE oil minister Obaid Al-Nasseri said it would be difficult for the oil cartel to increase production as it is already at almost full capacity, a concern shared by analysts.

Eagles said of the OPEC ministers, "Politically they are important but in practical terms few observers believe that there is any significant spare capacity outside of Saudi Arabia."

The oil minister for Iran, the second-biggest producer within OPEC, also poured cold water on any hopes among oil-importing nations that the cartel might agree to pump more oil at their formal meeting on Tuesday.

Bijan Namdar Zangeneh said it was "not at all justifiable to increase OPEC production," in remarks carried by the official Iranian IRNA news agency.

"There is no shortage of oil in the market and present prices are not at all indicative of the market situation," he said in Tehran before leaving for Vienna.

OPEC ministers are therefore expected to agree to maintain the cartel's overall output ceiling of 24.5 million barrels per day, rolling over a 6.5-percent increase introduced at the start of February to compensate for disruption to supplies from strike-hit Venezuela.

Commerzbank analyst Jon Rigby agreed that this was the most likely outcome because "there isn't a great deal of new capacity to be introduced."

"The second thing is that the market is probably reasonably well supplied at the moment, simply because we are now moving towards the second quarter when demand typically falls for seasonal reasons (spring in the northern hemisphere).

"Also, Venezuelan production is starting to increase again and OPEC had increased production to compensate for Venezuela. All those things point to the fact that an increase in OPEC quotas is unlikely," he added.