Brisk pre-OPEC buying boosts crude prices

By Hil Anderson UPI Chief Energy Correspondent Published 6/9/2003 6:23 PM

LOS ANGELES, June 9 (<a href=www.upi.com>UPI) -- Crude futures reached a 12-week high Monday as traders dug in ahead of anticipated production cuts by OPEC that are aimed at offsetting Iraq's return to the oil market, but that could take effect even before Iraqi exports resume.

July crude settled 17 cents higher at $31.45 per barrel on the New York Mercantile Exchange Monday, while OPEC officials continued dropping hints the cartel could decide this week to reduce output to prevent a price collapse when Iraqi exports hit the market later this summer.

The timing of Iraq's return to the export market is not clear, which apparently had refiners and speculators preferring to stock up as a precaution against being caught short during the peak demand of the summer driving season in the United States.

"The war in Iraq has been over for over a month, and the OPEC basket price has risen to the upper part of its target range," the U.S. Energy Information Administration noted in its latest assessment of OPEC's intentions. "Part of this may be attributable to the replacement of the 'war premium' by an 'uncertainty premium' over the anticipated time period when Iraqi oil exports will resume and reach pre-war levels."

Iraq has already announced it would accept bids for some 8 million barrels of crude stored in Ceyhan, Turkey, since before the war; however, Iraq's capability for sustained production and exports from its oilfields are a far larger factor in how world crude prices will shape up for the remainder of the year.

A sizable delay between the sale of the Ceyhan oil and the resumption of regular exports could leave the world's consuming nations in a lurch during July and August when demand for gasoline in the United States is at its highest.

"We've seen nearly three months of slowly falling prices and that trend should continue for the short term," Carol Thorp, a spokeswoman for the Automobile Club of Southern California, said as AAA's nationwide average retail gasoline price held at $1.49 per gallon. "Crude oil and gasoline inventories have increased significantly in recent days, which relieves some analyst concerns over potential supply problems. However, crude oil prices have climbed back to $30 per barrel range and this could affect retail prices later in the summer."

Meanwhile, OPEC is looking past the summer to the time when the shoe will be on the other foot. Autumn tends to see gasoline demand drop as summer vacations come to an end, which could leave OPEC in a buyers market at the same time Iraq is trying to regain its share of the world market.

OPEC may also be contributing to the perceived oil glut by its own capitalistic instincts to cash in on the current bull market for crude. With NYMEX well over $30 per barrel, the OPEC nations have been increasing their output over and above their official quotas.

The authoritative oil publication Platts Oilgram reported Monday that the 10 OPEC members -- excluding Iraq -- produced 26.35 million barrels per day last month, up 250,000 bpd from April and a combined 1.85 million bpd above the official quota. Only Nigeria, Indonesia and Venezuela were within their quotas, suggesting that OPEC's Middle East members were not prepared to surrender their market share to Iraq.

As happened at its last meeting, OPEC may announce it will reduce production by amounts that in reality only bring output in line with the current quota.

"Instead of reining in overproduction towards their new quotas, most OPEC countries have actually increased production. With (NYMEX) WTI (West Texas Intermediate crude oil) around $30/bbl and (International Petroleum Exchange) Brent around $27/bbl, there has been little incentive for them to cut back," said John Kingston, global director of oil at Platts. "Some OPEC officials have talked about cutting official quota levels at the June 11 meeting in Doha, Qatar, but that looks unlikely now."