Oil prices rise as OPEC mulls supply cut

April 9, 2003, 3:53PM Reuters News Service

NEW YORK -- Oil prices gained today as Saddam Hussein's rule over Iraq collapsed and OPEC considered cutting back extra supplies, pumped mainly by Saudi Arabia to head off a war spike in energy costs.

U.S. light crude oil on the New York Mercantile Exchange jumped 85 cents, or 3 percent, to $28.85 a barrel. London Brent blend was up 65 cents at $25.25 a barrel.

Trade was slow as dealers watched events unfold in Baghdad.

"Since the invasion of Kuwait in 1990, Iraq has been a perennial feature of the world oil market, so it wasn't surprising people sat back today just to watch," said Peter Gignoux, head of the London energy desk at Citigroup.

Amid wild scenes, jubilant Iraqis welcomed advancing U.S. forces in the Iraqi capital and rampaging looters attacked symbols of Saddam's power. Thousands of U.S. troops moved into the center of the Iraqi capital, meeting little resistance.

There was no word on the fate of Saddam or his sons, targeted on Tuesday by U.S. planes that bombed a residential area in Baghdad thought to be housing the Iraqi leader.

U.S. forces said there were still battles to fight in northern Iraq and in Saddam's hometown of Tikrit, north of Baghdad.

Dealers said expectations were that an OPEC emergency meeting later this month will rein in galloping production to avert a potential price collapse in the second quarter, when demand tails off after winter.

Oil prices have fallen heavily from prewar peaks but prices are still near the middle of OPEC's $22-$28 target range for an index of cartel crudes.

OPEC at the April 24 gathering is expected at least to erase excess supplies of some 2 million barrels a day now being pumped above formal output limits of 24.5 million bpd.

It may also consider reducing those quota limits.

Two oil ministers -- those from the UAE and Algeria -- say a renewed commitment to existing quotas would probably be sufficient to balance supply and demand.

"It is possible that just by abiding by quotas we could reestablish a good balance in the market because we have to be concerned about it beyond this quarter," said Algerian Oil Minister Chakib Khelil.

"We have to be concerned about summer when demand for gasoline increases so we can't just make a decision now and see prices taking off in the summer," he told reporters in Paris.

Leading OPEC producer Saudi Arabia pushed output 1.5 million barrels a day above its official quota to help cushion the impact of the loss of Baghdad's 1.7 million bpd of exports during the U.S. invasion of Iraq.

"I expect OPEC to announce a more prudent production policy to accommodate rising production from Venezuela and Nigeria and Iraq in the next three to four months," said energy analyst Gordon Kwan at HSBC in Hong Kong.

"They will probably tighten up compliance to production quotas because it will be difficult for them to cut until there is clear visibility to the market that Iraq will restore exports," said Kwan.

Extra OPEC oil has helped lift low U.S. crude inventories in recent weeks, but the latest data released today recorded a surprise fall. The U.S. government's Energy Information Administration said inventories fell 3.6 million barrels to 277 million last week.

The prospect of Iraqi crude staying out of the market for some time yet hardened when a U.N. official confirmed on Tuesday that exports were unlikely to resume in the near future.

The United Nations oversees the oil-for-food program that allows Iraq to sell crude in exchange for humanitarian aid under U.N. sanctions imposed after it invaded Kuwait.

Benon Sevan, undersecretary-general in charge of oil-for-food for Iraq, said oil under contract and not yet lifted or oil stored in the Turkish Mediterranean port of Ceyhan would stay there until a competent authority was available.

The U.S. military has said it will take about three months to resume exports from the big southern Iraqi Rumaila oilfields. The military has still to take control of Iraq's northern oilfields around Kirkuk.