IEA: Oil markets tight - Problem is seen with Iraqi shortfall

www.timesdispatch.com THE ASSOCIATED PRESS Mar 13, 2003

VIENNA, Austria - A surge in world oil output last month has left producer countries with too little spare capacity to fully offset a wartime halt in supplies from Iraq.

The International Energy Agency said yesterday that output increased 2.5 percent worldwide in February and that oil inventories tightened in major importing nations. Fears of a U.S.-led attack on Iraq propelled prices to their highest levels since the 1991 Persian Gulf War.

International oil markets are "running on empty" as war clouds gather again in the gulf, the agency said in its monthly oil market report.

"A further supply disruption would tax a system operating at close to capacity," the report said.

The only reliable cushion for consumers may be the 4 billion barrels in strategic stocks of crude that IEA members have amassed for use in an emergency, it added.

The agency issued its grim assessment a day after the Organization of Petroleum Exporting Countries decided to leave its oil production quotas unchanged at 24.5 million barrels a day. OPEC, which pumps about a third of the world's crude, made clear that it would boost its output to try to cover any shortfall arising from a war.

The IEA is the energy watchdog of the Organization for Economic Cooperation and Development, a group of the world's wealthiest oil-importing countries.

While highlighting many causes for concern in oil markets, the IEA expects that the end of winter - the peak season for heating oil sales - will reduce demand for crude by about 1.6 million barrels a day. Such a decrease would offset a loss of Iraq's exports under the U.N. oil-for-food program, the report said.

World production rose in February by 1.96 million barrels a day to 79.41 million barrels, and OPEC contributed more than three-fourths of the increase, the agency said.

OPEC claims to have 2 million to 4 million barrels in additional production capacity. The IEA argued that OPEC's "effective spare capacity" - the additional crude it could produce on short notice - was much smaller.

The agency said OPEC's effective spare capacity fell last month to 1.72 million barrels a day from 2.37 million barrels in January, as the cartel produced more oil to make up for deliveries during Venezuela's strike. With OPEC increasing production to cash in on high prices, this extra capacity has probably diminished in March to fewer than 1 million barrels a day, the report said.

Iraq produced 2.49 million barrels a day in February. If U.S.-led forces attacked Iraq during the second half of March, the IEA suggested that it would be May before OPEC could offset the shortfall.

On the New York Mercantile Exchange yesterday, April contracts of U.S. light, sweet crude rose $1.11 to $37.83 a barrel . On the International Petroleum Exchange in London, April Brent rose 62 cents to $33.91 a barrel