Oil: Prices end lower, market digests Opec quotas increase

<a href=www.nzherald.co.nz>nzherald.co.nz 26.04.2003 8.30am

NEW YORK - Oil prices fell for the fourth straight day on Friday (New York time) as traders puzzled over Opec's surprise deal to raise formal output quotas while promising to cut excess supply.

In New York, US crude futures CLc1 ended at $26.26 a barrel, down 38 cents on the day and 15 per cent for the week that included a five-month low on Thursday. Benchmark Brent crude oil LCOc1 lost 24 cents to $24.09 a barrel.

Prices dropped after the Opec cartel's Thursday decision to raise production quotas and cut back less than expected on extra crude it pumped to stop prices from spiking during the US-led war in Iraq.

The Organisation of the Petroleum Exporting Countries presented the deal as a cut of two million bpd from real output levels, which had soared above official quotas in the first few months of the year.

Some analysts said Opec's estimates of current production, and its figures for the promised cut, were confusing and did nothing to allay fears of a supply glut once Iraqi crude exports resume.

"Opec's surprise quota increase unnecessarily confused the market at a time when there is sufficient uncertainty with debate over the return of Iraqi volumes, concerns over economic recovery and the impact of the SARS virus," said Matthew Warburton of UBS Warburg bank in a report.

The cartel had sanctioned extra oil sales before the war in Iraq to prevent an oil price shock. Some Opec members, particularly Saudi Arabia, had ramped up supplies earlier to cover for hitches in Venezuela and Nigeria.

"Now Venezuela is back, Nigeria is back, the war is over and the world is coming back to normal, we are trying to normalize things," said Opec President Abdullah al-Attiyah.

Dealers said that, with Iraq already off the market for a month, the other 10 Opec members seemed intent on grabbing market share before tackling the re-integration of Baghdad in the cartel's system of output limits.

While it will be some time before Baghdad even matches prewar production, down the road it has the potential to snatch second place in Opec's ranks behind Saudi Arabia.

Before the war, Iraq was pumping at a peak of 2.5 million bpd and its exports -- controlled by the United Nations under a humanitarian sales scheme -- accounted for around 4 per cent of internationally traded oil.

United Nations members are still discussing a new legal framework under which Baghdad could resume oil sales to the world market.

The United States will introduce a resolution in the council next week that lifts sanctions against Iraq and calls for a special UN coordinator in a low-level consultative role, Bush administration officials said.

The resolution -- which is bound to be contentious with permanent UN Security Council members Russia and France -- would end UN control over the lucrative oil-for-food programme.

The draft US resolution appeared to be an opening ploy and would probably be whittled down once negotiations began, diplomats said.

"The timing and magnitude of Iraqi exports is uncertain and will likely complicate Opec's deliberations for many meetings to come. Opec will reduce production to accommodate Iraqi oil, but with a lag of several months," said Mike Mayer, analyst with Prudential Financial.

Saudi Arabia's Oil Minister Ali al-Naimi said output could be trimmed again at an Opec meeting in Qatar on June 11, just days after the new deal takes effect on June 1.