OPEC to maintain oil production
But prospects for big new Iraqi supplies remain 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 <a href=www.msnbc.com>MSNBC
June 11 — OPEC ministers decided Wednesday to leave production quotas just where they are. With crude oil prices high, and world stockpiles at historic lows, the case for cutting output was too hard to make. But the cartel will be keeping a close eye on how quickly U.S. forces and Iraqi workers can increase Iraqi oil exports — and what impact those new supplies have on prices. WITH OIL PRICES hovering above $31 a barrel, comfortably above OPEC’s price target of $22-$28, even the group’s most militant members had 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. So OPEC hedged its bets, calling for another meeting July 31. “Then we will have some options — either to cut production or not. That is what we need to decide,” said OPEC President Abdullah bin Hamad al-Attiyah. The group Wednesday also gave the usual warnings to member states to stop exceeding their quotas and comply with the production schedule. With prices above OPEC target price range, producers have been overpumping their quotas by about 1.5 million barrels a day, lifting overall output to 26.9 million barrels. But the main threat to OPEC’s control of oil prices is the resumption of Iraqi output, now under the control of U.S.-led coalition forces. Iranian Oil Minister Bijan Namdar Zanganeh said earlier Wednesday that OPEC “must be very careful in handling Iraq’s return.” 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. 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, on top of 12 years of decay under U.N. sanctions, have left Iraqi oil facilities badly crippled. Iraq, which was excluded from OPEC quotas while under U.N. sanctions, pumped about 2.5 million barrels a day, including crude for domestic consumption. Iraqi oil officials have said exports would reach a million barrels a day by July, and could reach 2 million barrels by the end of the year. But 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. OPEC members say they, too, have no idea how quickly Iraqi production will ramp up again.
“The pace and the extent of the return of Iraqi crude to the market remain unclear,” said al-Attiyah, the OPEC president. Iraq was not represented at the meeting. 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.
• Petroleum primer • Oil and the markets All this means that OPEC has tried to hedge its bets. The group invited seven non-OPEC members to Wednesday meeting in Doha, 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
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. If OPEC members do comply with their quotas, an American national industry report has predicted that U.S. consumers may have to pay more per gallon as demand increases during the summer vacation months.