Opec sees oil tidal wave where analysts fear dry spell

April 22, 2003 By <a href=www.busrep.co.za>BusinessReport.com-Sapa-AP

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.

It has called an emergency meeting for Thursday to assess post-war 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 believed the world was oversupplied by 2 million barrels a day at a time when seasonal demand normally slips to its lowest level of the year.

But energy analysts warn that crude oil 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 the northern summer, the peak season for petrol 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 to assess market conditions in the immediate aftermath of the war. This will not be easy, and some analysts argue that such a meeting is premature.

No one knows when Iraq 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 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 overreached 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 US and other importers for its proactive, and unofficial, rise in output. By some estimates, Opec's 10 members, excluding Iraq, pumped 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 US light sweet crude had fallen more than one-third, from a high for the year of $39.99 a barrel reached on February 27.

Opec worries that prices may have further to fall.

"I do not think there is any necessity for Opec to carry on with excess production," Iranian oil minister Bijan Namdar Zangeneh said last week in Tehran.

"We should consider a cutback in production to balance supply and demand, especially in the second quarter." Many analysts accept that a production cut may be a foregone conclusion.

Kevin Norrish, the 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 its targeted price range.

Leo Drollas, the chief economist of the London-based Centre for Global Energy Studies, suggested a cut of 650 000 barrels a day would stabilise prices.

But 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, the head of the International Energy Agency - a watchdog agency for the world's leading importers - warned last week that a cut in output would not actually take effect until demand started to rise in the third quarter. - Sapa-AP