OPEC fears oil price drop to $20/barrel

By NEELA BANERJEE <a href=www.abs-cbnnews.com>abs-cbnnews.com-The New York Times

When the Organization of the Petroleum Exporting Countries (OPEC) met five weeks ago to set its spring export levels, it faced an uncertain world, one clouded by the prospect of a war in Iraq. When it meets again on Thursday, it will face more uncertainty now that the main fighting is over.

Before the war, most of OPEC’s members pumped oil at maximum levels to make up for an expected curb in Iraqi exports -- something that in fact occurred -- and prices moved higher. They had climbed through the winter, not only in expectation of war but also because of political strife in Venezuela and ethnic clashes in Nigeria, and then swung back and forth on news from the battlefronts in Iraq.

On Thursday, the last trading day before the Easter holidays, the price of crude oil rose $1.37, or 4.7 percent, to $30.55 a barrel on the New York Mercantile Exchange.

Still, OPEC worries that if it does not scale back its extra production soon, oil prices will fall below $20 a barrel, beneath the group’s ideal price range of $22 to $28.

Despite the currently robust prices, OPEC is concerned in large part because of a belief among oil traders, shaped by optimistic forecasts by the US government, that Iraqi exports could resume in weeks. Combined with the additional OPEC production, this reasoning goes, that could create a glut.

Yet most oil experts agree that it is too early to tell when Iraqi exports might return and at what quantities, given the tangle of technical, financial and diplomatic issues that must be sorted out by the American authorities now running Iraq. It is not even clear who might represent Iraq, an OPEC member, at this week’s meeting in Vienna or whether it will even remain in OPEC, a seemingly distant issue that already concerns other members.

Add to the mix the weak global economic recovery and the economic effects of the respiratory illness sars, industry experts say, and it becomes difficult for OPEC to make a sound decision about how much oil to pump.

“It’s very hard now to look at the supply-demand balance,” said Mehdi Varzi, president of Varzi Energy, a consulting firm in London. “The picture is so mixed up with what’s happening in the Middle East still.”

Representatives from the Army Corps of Engineers responsible for repairing oil fields in Iraq have said that some oil exports could start flowing again in weeks. Kurdish leaders who entered the northern oil region near Kirkuk with American soldiers have predicted the same.

But it remains unclear who has the right to export Iraqi oil. Under UN sanctions, Iraq can export its oil only through the oil-for-food program, and the Bush administration is pressing the Security Council to change that agreement so the United States can sell Iraqi oil. When this might happen is unclear.

Also, some Kirkuk fields have been so efficiently ransacked that managers there say it may be several months before they can produce enough oil for export. And it remains unclear who will pay to replace what was looted from Kirkuk to make that possible.

Some OPEC leaders, like Algeria’s oil minister, Chakib Khelil, say the group will most likely rein in extra production to the official quota levels of 24.5 million barrels a day. It is now producing nearly 26 million barrels, according to recent estimates by the Middle East Economic Survey. And Venezuela and Nigeria have resumed degrees of production.

Such a cutback might be enough to calm a market in which many oil traders and buyers think demand will be slack because of the sluggish world economy. In addition, the sars outbreak has already slowed economic growth in Asia and led to a drop in demand for jet fuel by several hundred thousand barrels a day because of a decline in tourism, said Lawrence Goldstein, president of the Petroleum Industry Research Foundation in New York.

Goldstein warns that there could be perils to a decision by OPEC to reduce output below 24.5 million barrels a day. Inventories of crude oil and gasoline were very low coming into the spring, and they are being replenished rapidly now by the increased OPEC output. But if that process stops, oil and gasoline prices may again rise as the United States, the largest oil consumer by far, enters the summer driving season.

Who will speak for Iraq on Thursday, and try to answer the unanswered questions, remains a mystery. There is no Iraqi government and the United States has yet to announce the structure of an interim oil ministry. Already, some OPEC members and many people in the Middle East worry that under American influence, Iraq could soon leave OPEC to pump a lot of oil on its own.

But Goldstein contends that Iraq can do that and stay in OPEC. While its oil output was determined by UN sanctions, the rest of OPEC took its market share, produced oil in its stead and pocketed the extra revenue.

Now, Goldstein and others say, Iraq might tell OPEC that it will pump as much as it can to make up for those lost years of revenue. Before the war, it produced about 2.8 million barrels a day and exported, legally and otherwise, about two million barrels of that.

“Iraq will produce what it’s capable of producing,” he said, “whether it stays in OPEC or not.”

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