OPEC move leaves market confused --
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LONDON: The OPEC oil cartel, having vowed to cut output but raise production quotas, has sent confusing signals to the oil market which is still wary of a glut of crude once Iraqi exports resume, analysts said on Friday. Members of the Organisation of Petroleum Exporting Countries said on Thursday they would tighten the taps to the tune of two million barrels per day (bpd) to mop up excess crude on world markets after the Iraq war.
But, recognising that OPEC quotas are being flouted, the ministers meeting in Vienna also increased their official production ceiling by 900,000 bpd to bring it closer into line with reality. Both measures take effect on June 1. "What could have been a fairly straightforward announcement thoroughly confused people," said Bruce Evers, analyst at Investec Securities. "I think that's partly why the price has reacted the way that it has, because it smacks of smoke and mirrors."
Oil prices initially fell in response to the decision, but later recouped their losses. Reference Brent North Sea crude oil stood at $24.26 per barrel in late morning deals here, down four cents from the previous closing price.
Evers said that prices should remain fairly stable in the near term. "Underlying demand is a little bit fragile but it's a lot better than it was last year. You've got fairly low inventories and that's an important part of the jigsaw," he said. Although demand is expected to ease as winter thaws in the northern hemisphere, US oil stocks are low after a recent strike in Venezuela. Oil firms usually rely on spring to refill stocks.
But analysts said that although OPEC had probably done enough to stabilise the market in the short term, it could be storing up trouble for later in the year when oil from postwar Iraq hits world markets.
"In the near term, they probably have done sufficient to stabilise the market," said Paul Spedding, analyst at investment bank Dresdner Kleinwort Wasserstein. "I think the real problem for OPEC will come in the third quarter because there is a very high risk at that stage that Iraq will be exporting again and that means that the new quotas will have to be reduced to take Iraqi oil into account."
The ministers of 10 out of OPEC's 11 member countries indicated that they were ready to curb output again if needed, possibly as soon as at their June 11 meeting in Doha, Qatar.
Iraq has not been included in the OPEC quota system since UN sanctions were slapped on Baghdad in the wake of its 1990 invasion of Kuwait. But with the United States pushing for the sanctions to be scrapped, other OPEC members are hoping Iraq will re-enter the quota system. The last sustainable level of Iraqi production before the war had been about 1.5 million bpd, but the country was unlikely to regain such levels for several months, Evers said.
"Although the Americans talk of getting production back up and running any day, if one's sensible about it you're going to be looking at probably two to three months before getting back to a sustainable level of meaningful production," he said.