OPEC seen holding quotas steady-- But prospects for big new Iraqi supplies remains a wild card
Iraqi workers inspect equipment at the Basra oil refinery in mid-May. Almost all of the 2,600 Iraqi employees at the plant are now back at work.
By John W. Schoen MSNBC
June 10 — When OPEC meets Wednesday in Doha, the cartel will probably leave production quotas just where they are. With crude oil prices high, and world stockpiles at historic lows, the case for cutting output is pretty hard to make. Mostly, they’ll be trying to assess the threat of a big new supply of Iraqi oil hitting global oil markets, as U.S. forces and Iraqi workers scramble to get that country’s oil industry back on its feet. WITH OIL PRICES hovering above $31 a barrel, comfortably above OPEC’s price target of $22-$28, even the group’s most militant members will have a hard time making the case for cutting the current quota of 25.4 million barrels a day. Still, the big worry for the Organization of Petroleum Exporting Countries is that a bigger-than-expected flow of Iraqi oil could send prices falling quickly. Iraqi officials last week began accepting bids for about 10 million barrels of oil in storage that was produced before the U.S. led invasion in March. Iraq’s de facto oil minister Thamir Ghadhban has said exports would reach a million barrels a day by July, about half pre-war levels. But it’s a lot less clear how soon the country’s creaking oil infrastructure can be patched together well enough to begin exporting in significant volumes. Looting and sabotage since the war have left Iraqi oil facilities badly crippled. Some oil analysts say the current timetable for bringing Iraqi production back on line are too optimistic.
“I think the market has overestimated the ability or Iraq to start pumping oil,” said Phil Flynn at Alaron Trading.
Still, some OPEC ministers are concerned that they may overshoot production if they continue pumping at current levels — especially if a soft global economy continues to hold back demand. Since the cartel last set quotas, tight supplies have eased from two key members.
Venezuela, where a lingering strike cut earlier this year production to below 600,000 barrels per day, was producing an average of 2.1 million barrels a day in April, according to a Lehman Brothers report. And Nigeria’s output has likely risen after falling to below 2 million barrels a day in April. Those outages helped drain reserves to about 100 million barrels below the historical range for this time of year, the report said. All this means that OPEC wants to hedge its bets — even if it leaves production at current levels. One sign is that the group has invited seven non-OPEC members, including major producers Russia, Mexico and Norway, to coordinate another production cut if prices fall. OPEC is trying to head off another battle for market share between the two groups that sent prices sliding in late 2001. Even if Iraqi production rises to pre-war levels quickly, oil prices may continue to draw support from extremely tight supplies.
Meanwhile, shortages of natural gas have sent the price of that fuel soaring. Federal Reserve Chairman Alan Greenspan in Congressional testimony Tuesday said it’s not likely that natural gas prices will fall soon. That helps support oil prices because it eliminates a cheaper alternative to crude for businesses, like power companies, that can switch fuels. High nat-gas prices seen into 2004 And, if oil prices do start falling again, there nothing to prevent OPEC from calling for a quick production cut. “We are concerned because prices are high not because of a lack of oil, they are high because of uncertainty,” said Algerian Oil Minister Chakib Khelil on Tuesday. “If the conference comes out with no change it might be necessary to meet again before September.” OPEC’s next meeting is scheduled for September 24.
Playing now: • Dow down 29 points; Nasdaq adds 9 • Oracle raises bid for PeopleSoft • Kodak blames SARS for weak sales The real worry is that, with U.S. forces in charge of Iraq’s oil production, OPEC now confronts a major new supplier under U.S. control. If Iraqi production rises quickly above pre-war levels, OPEC and other major oil producers will have to make a painful choice — either sharply cut production to maintain prices, or let prices fall and produce more oil to make up for lost revenues. “They really don’t want to lose that market share,” said Robert Baer, a CIA veteran who now writes about the Middle East. Reuters contributed to this story.