OPEC production cuts coming, but how much? Return to quotas possible as `all options' on table

April 16, 2003, 12:38PM By DAVID IVANOVICH Copyright 2003 Houston Chronicle Washington Bureau

WASHINGTON -- OPEC will consider slashing its crude production next week, fearing the quick war in Iraq could send crude prices nose-diving.

Oil prices edged closer to $30 a barrel Tuesday after oil ministers finally agreed to meet April 24 in Vienna.

The goal of this meeting is to rethink the Organization of the Petroleum Exporting Countries' production strategy for the coming months.

"All options" will be on the table, OPEC Secretary-General Alvaro Silva said.

Some OPEC watchers say the cartel could agree to cut production by nearly 2 million barrels a day, or about 7 percent, from current levels.

So far this month, the 10 OPEC countries whose output is controlled by production ceilings have been pumping 26.4 million barrels a day, according to the U.S. Energy Information Administration.

That's 1.9 million barrels a day more than their output quotas would allow.

The OPEC producers have been pumping a great deal of extra crude in recent weeks to offset the loss of nearly 2.5 million barrels a day of Iraqi crude production, which has been off line since the war started.

The OPEC countries had pledged to make up for any supply disruptions as a way to dissuade the United States and other industrialized nations from tapping their strategic petroleum reserves.

But the speedy U.S.-led victory in Iraq and the relatively minor damage inflicted on Iraq's oil fields have wiped out most of those war jitters.

And now OPEC members are asking whether the group's output is about to glut the market.

"I think they'll go back to their quota," noted John Lichtblau, chairman of the New York-based Petroleum Industry Research Foundation.

Michael Rothman, senior energy market specialist for Merrill Lynch in New York, argued that OPEC's current ceiling is too low, considering that petroleum inventory levels remain well below normal.

"I don't think the meeting is designed to implement a new policy but to signal to the oil market that they are not going to implode," Rothman said.

Seven of the OPEC members are currently pumping more than their quotas would allow. But Saudi Arabia, the cartel's largest producer and de facto leader, accounted for the bulk of that extra production.

Saudi Arabia, which had been producing only 8.1 million barrels a day in December, is currently cranking about 9.6 million barrels a day, its highest rate in 13 years and about 21 percent above its production limit.

It has ignored its quota because world inventories had dropped dangerously low with the lost production from Venezuela because of labor strife, plus the potential for lost Iraq production when war started.

Days before the fighting began, Kuwaiti officials had announced plans to shut in crude production near the Iraqi border to guard against attack. But fears that Iraq would lash out at Kuwait quickly dissipated. Kuwait is pumping full-out, producing an average of 2.45 million barrels a day this month, 25 percent above its ceiling.

The OPEC producers are concerned about overproduction because the second quarter is traditionally the weakest of the year for oil demand.

Winter is over, while the busy summer travel season has yet to begin. U.S. refineries usually use this period to build inventories, and stocks in the United States are extremely low.

Oil demand was already hampered by a slowdown in the world economy, while the war and the Severe Acute Respiratory Syndrome or SARS epidemic have taken their toll on world travel.

Since the start of the war, crude prices have dropped substantially, as oil traders realized their worst fears -- many oil fields in flames -- were unwarranted.

But the much-feared price crash has not occurred, as it did after the last Gulf War. On Monday, the OPEC basket of crudes fetched an average price of $25.35 a barrel, smack in the middle of the group's desired $22 to $28 price band.

But price hawks like Iran are fearful the United States intends to use Iraq's crude production to hobble the OPEC cartel. Even if other members do not subscribe to such fears, they realize OPEC must make room for the resumption of Iraqi exports.

Vice President Dick Cheney said last week White House officials hope to get Iraqi production back up to 2.5 million to 3 million barrels a day by the end of the year.

Many industry experts believe the new government could be exporting 1 million to 2 million barrels a day by the end of June, Lichtblau said.

But to do that, they'll have to get permission from the United Nations to market the oil.

"The legal issue at the moment is overriding any kind of physical problems," Lichtblau said. "They could start exporting oil, not immediately, but very soon.

During the years of economic sanctions, the U.N. Security Council has controlled Iraq's oil sales through its oil-for-food program.

The United States and Great Britain are poised to ask the United Nations to allow a new government in Iraq to use the proceeds to rebuild the country.

What is unclear is how or when the council will respond.