Spare oil capacity squeezed: IEA - Iraq's oil supplies are expected to shut in the event of an attack.

edition.cnn.com Thursday, March 13, 2003 Posted: 0019 GMT ( 8:19 AM HKT)

LONDON (Reuters) -- Spare OPEC oil production capacity has been squeezed to just half the volume of Iraq's exports, exposing world energy markets as war looms, the International Energy Agency said on Wednesday.

In its monthly Oil Market Report, the IEA said that production increases over the past two months had left effective spare capacity in OPEC at just 900,000 barrels per day (bpd) on the global market of 78 million bpd.

"This is less than the potential loss of supply in the event of war in Iraq," said the Paris-based IEA, adviser on energy to 26 industrialised nations.

The IEA report calls into question OPEC's claims that it has some 3 million bpd to hand in case of a U.S. attack.

Iraqi supplies, running at 1.7 million bpd over the past month, are expected to shut should the United States launch an assault against Baghdad. In addition, Kuwait has said it may need to suspend as much as 700,000 bpd as a safety precaution during war.

"The market is heading into a period of heightened uncertainty with low stocks and limited spare production and shipping capacity," the IEA said.

It said commercial petroleum inventories among its member countries had been eaten away during a cold winter snap in North America.

"Industry oil stocks are tight and trending around minimum operating levels in key markets," the agency said. "A further supply disruption would tax a system operating at close to capacity."

Worries about low inventories helped push oil prices sharply higher on Wednesday. U.S. light crude for April jumped $1.11 to close at $37.82 a barrel.

Prompt action promised

The Organization of the Petroleum Exporting Countries agreed at a meeting in Vienna on Tuesday to keep production limits unchanged for the time being and said in a communique it would take prompt action if needed to ensure stable supplies.

Most of OPEC's spare capacity is held by its biggest producer Saudi Arabia, but the IEA disputed Saudi claims to be able to pump 10 million barrels a day straight away.

The agency projected Saudi capacity at 9.5 million bpd in the second half of March, giving it just 400,000 bpd spare.

Riyadh was likely to lift capacity to 9.7 million bpd in April and 10 million bpd in May, it forecast, but still short of the 10.5 million bpd Saudi says it can pump at 90 days notice.

The IEA report said OPEC's spare cushion had shrunk from 3.3 million bpd in November. It estimated production rose by 1.5 million bpd in February to 27.18 million as Venezuela restored output after a strike and others opened the taps.

The IEA has said it will allow OPEC to try to cover any shortages in war before it considers, as a last resort, releasing inventories from emergency stockpiles held in consumer nations. The agency has the power to order a release from the mandatory reserves of crude and petroleum products.

Strategic stocks built up by the IEA after the 1974 Arab oil embargo were last used in the 1990-1991 Gulf crisis after Iraq's invasion of Kuwait.