Oil minister: Quota-busting key to oil overproduction

April 23, 2003, 8:34AM HoustonChronicle-Associated Press

VIENNA, Austria -- OPEC members must rein in their excess crude production and adhere to agreed output quotas as a first step in tackling the problem of global oversupply, one of the group's oil ministers said today.

Representatives of the Organization of Petroleum Exporting Countries are gathering in Vienna, Austria, for an emergency meeting Thursday to reassess oil production levels in the wake of the war in Iraq. The cartel's president has argued that producers are pumping 2 million barrels a day more than the world needs, and many analysts expect OPEC to agree to cut production.

"I cannot say 2 million or more or less, but obviously there is oversupply in the market," the United Arab Emirates' oil minister, Obaid Al-Nasseri, told reporters at a downtown hotel.

To forestall a potential oil shortage, many OPEC members ramped up their production before the outbreak of fighting in Iraq. Market nervousness triggered a steady rise in crude prices before the war, and producers were able to pocket handsome profits even as they earned plaudits from the United States and other major importers for their efforts to keep supplies flowing.

Now that the war has ended, OPEC, which provides a third of the world's oil, worries that the world is awash in crude just as seasonal demand ebbs to its lowest point. Prices have tumbled, and some group members fear prices may fall further unless they try harder to comply with OPEC's official output target of 24.5 million barrels a day.

The group pumped an average of 26.2 million barrels in March, according to estimates compiled by investment bank J.P. Morgan.

"I think we have to tackle first the compliance," Al-Nasseri said. "Then we shall see if there is a need to cut" the output target itself.

Saudi Arabia's oil minister, Ali Naimi, said one of the factors he and his colleagues would be studying is the impact that severe acute respiratory syndrome, or SARS, is having on oil demand.

"I know that SARS is affecting demand. It's having an effect on everything," he told reporters, referring to the cancellation of airline flights in Asia.

Jet fuel accounts for 8-10 percent of global crude demand.

Nigeria's presidential adviser on petroleum and energy, Rilwanu Lukman, said Tuesday in London he expected OPEC to cut production by 1 million to 1.5 million barrels a day. OPEC President Abdullah bin Hamad Al-Attiyah also has spoken in recent weeks of an oversupply of 2 million barrels a day.

However, some analysts see no need for cuts of this size. Crude inventories in importing countries remain low, and refiners want to build up stocks to more comfortable levels before gasoline demand peaks during the peak summer driving season.

"The cuts in production don't have to be anywhere near as drastic as some of the doomsayers were saying only a few weeks ago," said Raad Alkadiri of The Petroleum Finance Co., a consulting firm based in Washington.

Although demand for oil usually falls in the second quarter, Nigeria and Venezuela are still struggling to restore production after social unrest and a general strike, respectively, disrupted their output.

Whatever OPEC decides to do, it must factor in the eventual resumption of crude exports from Iraq and decide how to reintegrate Iraq into the group's quota system. Iraq is a founding member of OPEC but has not participated in its production agreements since the 1991 Gulf War and the United Nations' subsequent imposition of controls on Iraqi exports.

Analysts and U.S. military planners say Iraq is still at least several weeks away from resuming overseas crude shipments. If OPEC wants to limit overall oil production, it will need to somehow accommodate Iraq's future output.

Al-Nasseri offered no hint of the possible timing.

"Let's wait and see," he said. "Iraq has a long time to go, and we have to wait until the situation is settled there."

Oil futures were trading lower Wednesday, with contracts of U.S. light, sweet crude for June delivery down 22 cents a barrel at $27.77 in electronic trading in New York. U.S. crude futures jumped as high as $39.99 on Feb. 27, before hostilities began in Iraq.

June contracts of North Sea Brent crude were off 20 cents a barrel at $25.26 in London.