OPEC to meet amid tough questions-- Iraqi exports top the list of concerns

By Myra P. Saefong, CBS.MarketWatch.com Last Update: 2:54 AM ET June 10, 2003

SAN FRANCISCO (<a href=cbs.marketwatch.com>CBS.MW) -- The Organization of Petroleum Exporting Countries finds itself in a precarious position.

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Members of the oil cartel, which collectively produce around 40 percent of the world's oil, will meet Wednesday in Doha, Qatar, with a murky view of Iraq's oil exports added to the usual supply, demand and price concerns. OPEC's basket price for seven types of crude oil is near the high-end of its targeted level of $22 to $28 a barrel -- at $27.55 as of Thursday -- and U.S. crude inventories are more than 11 percent below year-ago levels.

"The recent run-up of oil prices and the looming question of the Iraqi supply contributions are putting OPEC in somewhat of a guessing game," said Michael Cavanaugh, an analyst at My Futures Online.

If OPEC cuts quotas, the cartel will be saying it expects Iraq to make a significant contribution. But this idea would backfire if Iraq can't contribute what OPEC expects, and "price uncertainty and volatility could drive crude to new highs," he said.

The cartel will also have to decide how to handle U.S. demand as the summer driving season kicking in, Cavanaugh said.

Recent concerns over tightening U.S. supplies eased last week when the Energy Department reported a 2.3 million-barrel rise in motor gasoline inventories for the week ended May 30.

But that's still down 5 percent from a year ago, and crude stocks are more than 37 million barrels below the year-ago level. Read the full story on supplies.

OPEC risks a "public relations nightmare, if [it] were to cut production now," said Todd Hultman, president of Dailyfutures.com, a commodity information provider.

Iraq: the biggest 'if'

The main reason for OPEC's meeting Wednesday is Iraq -- a member of the cartel that won't even be represented at the table.

OPEC's failure to invite the country that has the world's second-largest oil reserves raises the prospect that the cartel doesn't recognize the interim U.S. leaders there, according to some analysts.

So here's a "slight case for unrest among traders," said John Person, head financial analyst at Infinity Brokerage Services.

Iraq is selling about 10 million barrels of oil that's currently in storage. Read the Financial Times story. But news reports last week said equipment thefts will delay the flow of more oil through a major Iraqi pipeline by two months.

OPEC's decisions will be "influenced by expectations regarding Iraq's ability to resume crude exports," said Thorsten Fischer, an energy economist at Economy.com.

The "dismal state of its infrastructure will prevent Iraq's oil industry from exporting a significant amount of crude oil during the summer," he said, with repairs and upgrades to the outdated equipment taking longer than many analysts expected.

For now, Iraq has started exports of "small quantities" of fuel oil to Jordan and Turkey in barter exchanges for gasoline, according to the Energy Department's latest update.

To cut or not to cut

Oil producers have been giving confusing hints on what they'll decide at the meeting.

Indonesia, Venezuela and the United Arab Emirates are reportedly among those OPEC countries that don't expect a quota cut. OPEC President Abdullah al-Attiyah has said that while members will have to watch the return of Iraqi exports, they won't necessarily need to cut production.

Kuwait said it'll push for a cut, and Algeria has said current supplies are exceeding demand.

Most analysts predict that OPEC will leave its production quota unchanged and continue to monitor Iraq's exports.

At its meeting in April, OPEC decided to take what some analysts deemed a "fuzzy" mathematical approach to the output figures. It raised its production quota to 900,000 barrels in a move to cut 2 million barrels of actual production off the market. The new quota didn't go into effect until June 1, so it's unclear whether OPEC is sticking to its promise.

Most likely, OPEC won't change quota but will issue a statement saying it's monitoring the return of Iraq's oil production closely and will cut production as needed, said Dailyfutures.com's Hultman.

While John Vail, a senior trading strategist at Mizuho Securities USA agrees, he expects the market to see continued "cheating" among OPEC oil producers with "U.S. demand at record levels and private crude-oil inventories at their lowest level for this time of year since the early 1980s."

Cheating takes a toll

High prices have prompted many oil producers to overproduce, and that situation could intensify in the weeks ahead, said Infinity's Person.

He believes the "spigots will open from 'cheaters' within the organization in the coming weeks as prices are extremely rich from a producers' standpoint."

A Platts survey this week said OPEC producers, excluding Iraq, produced 26.35 million barrels per day in May. That's 1.85 million barrels per day above their official quota.

Michael Armbruster, an analyst at Altavest Worldwide Trading, said that Saudi Arabia, the world's biggest oil producer, appears to be more eager to improve its relations with the U.S. after the recent Riyadh terrorist attacks. As a result, it may be more "likely to acquiesce [to] U.S. pressure for more oil and lower prices," he said.

For now, OPEC can afford to "content itself with appealing to member countries to adhere more closely to existing quotas," said Economy.com's Fischer.

Iraq is currently exporting "very little" crude, the U.S. still has low inventories, and provided that OPEC refrains from rampant overproduction, "there is no reason to act now," he said.

If the cartel leaves its quota unchanged, the market will likely "redirect" its attention to compliance and actual production," Fischer said.

"Actual output is really what will determine the pace of inventory rebuilding in the industrialized world and emerging market economies," so that deserves more attention than the OPEC meeting," he said. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.