Oil market on knife edge warns IEA

news.ft.com By Toby Shelley Published: March 12 2003 9:21 | Last Updated: March 12 2003 9:21

The oil market remained on a knife edge with tight stocks and low surplus capacity meaning war against Iraq could tax the ability of the system to cope, said the International Energy Agency.

In its monthly oil market report the Organisation for Economic Co-operation and Development's energy security watchdog said that excluding Iraq and Venezuela, effective spare production capacity is 900,000 barrels a day. This is well below Iraq's export volume.

The IEA cautions that any notional spare capacity in Venezuela has to be discounted while the country rebuilds output after two months of disruptive strikes against the government.

However, the report notes that a seasonal drop in global oil demand is only weeks away as the northern hemisphere winter draws to an end. The 1.6m b/d quarter-on-quarter fall in demand translates into a lower "call" on Opec members for crude, so boosting their available spare capacity. The lower call on Opec "has the potential in itself to offset current oil-for-food exports".

But that raises concerns for Opec members, the report notes. If Venezuela rebuilds output more rapidly than forecast and war against Iraq is launched later than has been expected, the market would be oversupplied and prices would collapse.

In February world oil production surged by 1.96m b/d, 1.5m b/d of which came from Opec. Some 850,000 b/d came from Venezuela as it ramped up output. Industry stocks fell 44m barrels and provide forward cover of 50 days, 5.5 days less than this time last year.

The IEA said its forecast for 2003 demand for oil is unchanged at 78.01m b/d.