ANALYSIS-Iraqi oil not missed amid world sour crude glut

www.forbes.com Reuters, 03.20.03, 9:04 AM ET By Sujata Rao

LONDON, March 20 (Reuters) - World oil markets have been able to shrug off the effective loss of Iraq's oil exports because its high sulphur sour crude is of precisely the quality that is in abundant supply, traders say.

"It has got to the situation when we actually need a war to get Iraqi crude off the market," one trader with an oil major said. "There is an awful lot of heavy sour crude on the market -- it's a global phenomenon."

As the first U.S. missiles pound Baghdad, the absence of Iraqi crude supplies is hardly being felt as world markets are awash with barrels from the OPEC cartel.

Dealers had believed the loss of Iraq's 1.7 million barrels per day (bpd) of crude could send oil prices rocketing, and necessitate a release from international emergency stocks.

But now they say extra oil is the last thing they need.

"Sour crudes will suffer a lot with this war," said a U.S. trader. "If the U.S. releases crude from the Strategic Petroleum Reserve it will almost all be sour. If there is no release, Saudi Arabia will cover the shortage and Saudi oil is sour."

Sour differentials are hovering near historical U.S. lows of $7 under U.S. benchmark WTI sweet crude, as traders bet a war will be short.

European benchmark sour Russian Urals too is falling steadily from the recent highs caused by shipping delays.

Oil prices which spent most of 2003 above the $30 a barrel mark due to war jitters and the loss of barrels from strike-hit Venezuela, have steadied in recent days, partly because of large output increases by OPEC.

Saudi Arabia, seeking to cushion oil markets against a halt in Iraqi exports, raised supplies in April by up to 12 percent and is already pumping well above nine million bpd of its 10.5 million bpd capacity.

"What Saudi has done is produced more and more in anticipation of war. There is loads of it hitting the U.S. and no one really needs it right now," one player said.

The International Energy Agency, the West's energy watchdog, said on Thursday it saw no need yet to release emergency oil stocks as it was confident OPEC could make up for the shortfall.

But OPEC said the market was oversupplied.

"Oil prices are heading downwards. This shows there is more oil in the market than the market can absorb," OPEC President Abdullah al-Attiyah told Reuters in Doha on Thursday.

EUROPE TAKES VENEZUELAN CRUDE

The last planned shipment of Iraqi crude was set to sail from the Turkish Mediterranean port of Ceyhan on Thursday.

United Nations inspectors remain there to monitor exports and Iraq has said it will try to maintain the pipeline flow, but lifters who fear disruptions are not keen to send tankers there. Iraq's Gulf exports have halted.

Analysts say a key issue has been the delay to the war beyond February -- a month when winter energy demand is still high. In the milder second quarter demand usually drops about two million barrels per day.

U.S. refiners, preparing for the summer gasoline season have been running on low sulphur, or sweet, crudes rather than sour. This has started to send sour barrels to Europe in a rare reverse transatlantic arbitrage.

Several European plants have already bought Venezuelan sour crude, which has been falling fast against the U.S. sweet benchmark, and some importers say it is landing in Europe at a $1 advantage to Mediterranean sour benchmark Urals.

"Urals is the last bastion of sour strength. Now with Venezuelan barrels arbing, it is under pressure to correct," one trader said.

Higher Russian exports in summer and the end of weather-linked shipment delays would also pressurise sours.

In Asia, buyers who have received full contractual volumes of Saudi and other OPEC grades, are now shying away from importing their usual diet of sweet West African grades.

"What we have is Asia not taking much West African crude and unwanted Venezuelan in the U.S., backing into Europe," a trader said. "The oversupply problem is just going around the world."

(Additional reporting by Manuela Badawy in New York)