OPEC to Consider Crude Production Cut

Posted on Sun, Apr. 20, 2003 BRUCE STANLEY KansasCity.com-Associated Press

LONDON -By boosting production ahead of the war in Iraq, OPEC succeeded in allaying concerns about a possible oil shortage once the shooting began. Yet instead of celebrating its achievement, the producers' cartel fears the world is now awash in crude and at risk of a ruinous price crash.

The Organization of Petroleum Exporting Countries has called an emergency meeting for Thursday to assess postwar conditions in the oil market, with a view to slashing output to bolster sagging prices. OPEC President Abdullah bin Hamad Al Attiyah has said he believes the world is oversupplied by 2 million barrels a day at a time when seasonal demand normally slips to its lowest level of the year.

However, energy analysts warn that crude inventories in major importing countries are still alarmingly low. They argue that OPEC must be careful not to curb production so much that refiners face low stocks of oil as they head into summer, the peak season for gasoline consumption.

"This whole idea that there is a tidal wave of overproduction that's going to sink prices is just wrong," said Adam Sieminski, an oil price strategist at Deutsche Bank in London. "Inventories are extremely low, and Iraq is not producing, so there is no overproduction."

OPEC has timed its meeting in Vienna, Austria, to assess market conditions in the immediate aftermath of the war. This won't be easy, and some analysts argue that such a meeting is premature.

No one knows when Iraq, historically a large producer, will be able to resume its crude shipments. Nigeria and Venezuela, meanwhile, are still clawing their way back to production levels they enjoyed before social unrest and a national strike, respectively, dented their output.

Yet OPEC, which pumps about one-third of the world's oil, is eager to show that it is in control of - or at least closely monitoring - a tempestuous market.

OPEC's members agreed in January to a production target of 24.5 million barrels a day. They soon were busting their quotas, to profit from the high prices preceding the war as much as to reassure markets that supplies would be plentiful in spite of any hostilities.

OPEC earned plaudits from the United States and other importers for its proactive, and unofficial, production increase. By some estimates, OPEC's 10 members excluding Iraq were pumping an average of 26.2 million barrels a day last month - 7 percent above their quotas.

But oil prices tumbled as the conflict unfolded. By the time the fighting was over, futures contracts of U.S. light, sweet crude had fallen by more than one-third, from a high for the year of $39.99 a barrel reached on Feb. 27.

OPEC worries that prices may have farther to fall.

"I do not think there is any necessity for OPEC to carry on with its excess production. We should consider a cutback in production to balance supply and demand, especially in the second quarter," Iranian Oil Minister Bijan Namdar Zangeneh said Thursday in Tehran.

Many analysts accept that a production cut may be a foregone conclusion.

Kevin Norrish, head of commodities research at Barclays Capital in London, said OPEC would need to rein in output by 1 million to 1.5 million barrels a day to keep prices from sliding below $22 a barrel - the bottom end of the group's targeted price range.

Leo Drollas, chief economist of the London-based Center for Global Energy Studies, suggested that a much smaller cut of 650,000 barrels a day would suffice to stabilize prices.

However, crude inventories are unusually low for this time of year, and a deep cut by OPEC would make it harder for importers to build them to comfortable levels.

Claude Mandil, head of the International Energy Agency - a watchdog agency for the world's leading importers - warned last week that a possible cut in output wouldn't actually take effect until demand starts to rise in the third quarter.

Replenishing oil inventories is a priority, he added. U.S. crude stocks stood at 281 million barrels at the end of the first quarter, or nearly 43 million barrels below the average for the previous five years, according to the U.S. Department of Energy.

For Paul Horsnell, head of energy research at J.P. Morgan, the implications for OPEC's representatives in Vienna are clear.

"What they should do is nothing," he said.

Aside from policy issues, OPEC must wrangle with at least one glaring question of protocol: Who will represent Iraq at this week's meeting?

Iraq, a founding member of OPEC, hasn't participated in the group's production agreements since the 1991 Gulf War, but it normally sends at least one representative to OPEC's meetings.

With the toppling of Saddam Hussein's government, it's not clear who, if anyone, will speak for Iraq this time.

Iraq's acting ambassador to Austria, the cultural attache at Iraq's embassy in Vienna, served this function at OPEC's previous two meetings. Because the Austrian government still recognizes the embassy as Iraq's official representation in Austria, an OPEC source suggested that the attache, Khalid al-Shamari, may do so yet again.