Oil prices vacillate on Iraq and OPEC

Reuters, 04.08.03, 7:05 AM ET(Recasts, PVS SINGAPORE) By Jonathan Leff

LONDON, April 8 (Reuters) - Oil prices moved sideways on Tuesday as expectations of a swift end to the U.S.-led war on Iraq and a possible output cut from the producers' cartel OPEC pulled the market in opposite directions, dealers said.

The 11-member oil exporters' group is set to hold an emergency meeting on April 24 to discuss output cuts after prices slumped 30 percent in the past month, threatening to dip below the group's $22-$28 preferred price range.

U.S. light crude recovered an overnight fall to trade up four cents at $28 a barrel, down from nearly $40 at the end of February, while London benchmark Brent blend traded six cents up at $24.64. On Monday Brent hit a four-month low of $23.40.

"The market is supported by this talk that OPEC might cut production. This is the first we've heard from them for some time and it gives prices an excuse to retrace losses," said an IPE Brent broker from the London exchange floor.

"The war is still a very bearish factor, but without OPEC I think the rug would be pulled out from under us."

OPEC, which controls 40 percent of global crude exports, has lifted production this year to cover supply losses from a two-month strike in Venezuela and to prevent any spike in prices if Iraqi crude exports were cut off by a U.S.-led war.

But prices have actually plunged by as much as a third since just before the war began 20 days ago, prompting cartel officials to start talking of a potential cut in production.

"Currently oil is in oversupply in the market. But we will see the development of the price," Indonesian Mines and Energy Minister Purnomo Yusgiantoro told reporters.

The lynchpin will be powerhouse Saudi Arabia, which had hiked output to a 21-year high in March to compensate for stoppages from Iraq, where U.N.-supervised exports of about 1.7 million bpd closed before the start of hostilities March 20.

A Gulf source familiar with Saudi thinking told Reuters on Tuesday OPEC was ready to keep prices near its target $25, but did not say whether it was considering a cut in the formal output ceiling, now at 24.5 million barrels per day, or remove excess output above that level, now running at two million bpd.

U.S. BATTLES FOR BAGHDAD

The war in Iraq remained a bearish factor for prices, as dealers looked forward to the return of Bagdad's supplies to world markets and the development of the country's massive reserves, second only to Saudi Arabia's.

A short-lived war may mean minimum damage to Iraq's oil infrastructure, allowing supplies to flow sooner.

U.S. tanks fought an intense battle with Iraqi soldiers in the heart of Baghdad on Tuesday and officials said U.S. aircraft had dropped four 900 kg (2,000 pound) bombs in a residential area, specifically tageting Saddam and his sons Uday and Qusay.

The British army said it had taken control of Basra, Iraq's second city, while U.S. forces increased their presence in Baghdad.

Oil prices have also come under selling pressure as recent data on the U.S. economy have raised concerns that it may be heading into recession, which would choke demand for petroleum.