IEA fears low oil inventories could drive up gas prices

Friday, May 16, 2003

LONDON (News Tribune-AP) -- With OPEC mulling cuts in summer crude production, an already low level of oil inventories in major importing nations raises a risk of volatile gasoline prices as the peak driving season approaches, the International Energy Agency said Tuesday.

The U.S.-led war in Iraq interrupted crude output in that country and contributed in April to a decline in world oil production of 1.4 million barrels, or 1.8 percent. Although other members of the Organization of Petroleum Exporting Countries boosted their output to prevent a shortage, the IEA argued that some exaggerated their production levels and are making prices more unstable as a result.

"Unless producers continue to meet market needs, precariously tight first-quarter stocks will set the stage for tensions in the summer gasoline and the winter heating oil seasons. Crude and product stocks need time to rebuild," the agency said in its monthly Oil Market Report.

The IEA is the energy watchdog for the world's biggest oil-importing countries. It assesses market conditions but refrains from predicting their effect on prices.

"I think the chances are that gasoline prices will remain quite strong through the summer," said analyst Steve Turner of Commerzbank Securities in London. "I think we can just about avoid a spike if there are no nasty surprises" such as unscheduled refinery shutdowns, he said.

Total inventories of oil and refined products fell sharply, by 1.4 million barrels a day, during the first quarter. By contrast, inventories declined by just 300,000 barrels a day during the same period of 2002, and 100,000 barrels in 2001, the IEA said.

Crude inventories alone grew slightly during the quarter, as OPEC pumped more oil to offset the loss of exports from Nigeria and Venezuela. However, inventories of heating oil and other refined products plunged. The net result was that combined inventories were well below their five-year averages among all major importing countries, the agency said.

This supply pinch developed even before the war on Iraq, which halted Iraqi exports of about 2 million barrels a day, it said.

Peter Gignoux, managing director of the petroleum desk at Salomon Smith Barney, said inventories remain squeezed but attributed this partly to refiners who are putting off crude purchases in anticipation of a further slide in U.S. prices. Many buyers expect U.S. oil to fall to $24 a barrel, he said.

Average U.S. crude prices tumbled by 16 percent in April, and 6 percent in March, the IEA said. June contracts of light, sweet U.S. crude were up 93 cents at $28.28 a barrel in afternoon trading Tuesday in New York.

Members of OPEC, which pumps about one-third of the world's crude, have said they are considering cutting production when they meet next month in Doha, Qatar. The IEA said such a move would worsen price volatility.

The agency noted that no "tidal wave" of crude supplies has developed, despite a surge in OPEC production on the eve of the war and a seasonal decrease in demand in the second quarter. It argued that some OPEC members probably weren't pumping as much oil as they claimed and said this increased market uncertainty.

An industry source speaking on condition of anonymity said Saudi Arabia, the No. 1 crude producer, has already notified customers that it would reduce its crude deliveries in June by 14 percent to 20 percent.

World oil supplies averaged 78.42 million barrels a day in April, down from 79.82 million barrels in March. The collapse in Iraqi output shaved an average 1.27 million barrels off daily production last month. Output from the 10 OPEC members excluding Iraq rose by 167,000 barrels a day, with Venezuela and Kuwait posting the biggest gains, the report said.

The impact that Severe Acute Respiratory Syndrome is having in Asia led the IEA to trim its demand forecast for the year by 90,000 barrels a day. This cut represents almost half of the agency's earlier estimate for demand growth.