War showed oil markets work; OPEC grip slipping-BP

Reuters, 06.10.03, 9:53 AM ET LONDON, June 10 (Reuters) - War in Iraq showed oil markets can function in a crisis thanks to OPEC's creation of surplus capacity, but the cartel's actions have lost it market share and its influence may wane anyway, according to energy major BP. "No oil consumer faced a lack of availability," said BP's <BP.L> Chief Economist Peter Davies on Tuesday. "There proved to be no need to release emergency oil stocks," he said at a presentation. "In a sense the system works, and has now been tested by what can probably be called a normal crisis." Davies was speaking at the release of the world number three oil company's annual statistical review of world energy trends, and as OPEC ministers gathered to discuss production quotas at a meeting in Doha, Qatar. In the early months of 2003 supply disruptions in Venezuela and Nigeria and a cold northern hemisphere winter conspired with the wartime loss of Iraq's output to tighten supply. But OPEC's ability to fill the gap ensured that prices tumbled $10 a barrel from their $40 highs before the first shot was even fired, and supplies were maintained without market panic. This was largely thanks to the deliberate policy of Saudi Arabia and others of building in, then releasing, spare capacity, Davies said. In 1999 a crude glut took oil prices down to $10 a barrel. This hurt OPEC members' economies, and galvanised the cartel to rein in production to force prices back up. It has succeeded in reaching its target $25 a barrel each year since 2000 by keeping back the very capacity it was able to release in the Iraq war.

MARKET SHARE But Davies said OPEC's own actions will cost it market share -- and therefore market influence -- as supplies from the Caspian, deep water Atlantic basins like the Gulf of Mexico and offshore Angola, and Canadian oil sands fight for what little demand growth is on offer. Output growth in Russia alone has satisfied global demand growth for the past three years while OPEC's total ouptut has declined for three of the last four years and is at its lowest since 1995. OPEC cut output by 1.87 million barrels a day in 2002 to address a looming glut, but oil production outside OPEC grew by 1.45 million barrels a day in the same year. "I think it is unlikely OPEC is going to be able to access substantial growth and risks losing market share over the next several years," Davies said. "The broader oil market picture is one of slow world oil consumption growth but strong supply growth; in other words, weakening fundamentals." Some ministers at Wednesday's OPEC meeting share Davies' view that the strong prices prevailing for the past three years may evaporate as Iraq gears up to renew exports, but analysts expect them to hold quotas unchanged this time.