www.quicken.com Thursday, March 13, 2003 00:27 AM ET  Printer-friendly version   VIENNA -- Undermining the Organization of Petroleum Exporting Countries' reassurances that the cartel can keep the world adequately supplied with oil, the International Energy Agency says OPEC alone can't immediately make up for lost Iraqi exports in the event of a war in coming weeks.

The world's energy watchdog said the global oil market is extremely tight. The agency's latest data, released Wednesday, suggest that in case of a war in Iraq later this month, oil may have to be released from strategic stocks held by the U.S., Germany, Japan and other members of the 26-nation IEA to keep already-high prices in check.

The IEA's assessment irked OPEC ministers who decided Tuesday to leave the group's output limits unchanged. These officials, gathered in Vienna this week, had sought Tuesday to reassure oil consumers the cartel can and will increase supplies to offset a disruption in case a war cuts some two million barrels a day of exports from Iraq. On Wednesday, OPEC officials disputed the IEA's findings.

"There are many figures, but I think we have enough" oil-production capacity, Bijan Namdar Zangeneh, Iran's oil minister, said.

The IEA data showed a complex, moving picture of oil markets, where rising oil supply and a coming seasonal dip in demand will result in markedly different conditions at different points in time. The bottom line: OPEC can't cover a disruption of Iraqi supplies later this month. But its ability to cover such losses increases in April, and by May it can fully offset the loss of Iraqi supplies as well as a small reduction in Kuwaiti production. The reasons have to do with certain assumptions: a seasonal decline in demand for OPEC oil, rising output from Venezuela and capacity increases undertaken by Saudi Arabia, the world's largest oil exporter.

For the moment, though, the situation is dicey. The IEA reckons if war knocked off Iraqi exports from mid-March until May, and some 300,000 barrels a day of production were lost in Kuwait, the world faces a potential oil-supply shortfall of 1.68 million barrels a day during the second half of this month. For April, the shortfall in supply is reduced to 580,000 barrels a day. In May, OPEC can once again meet expected market needs in full.

This assessment may irk Ali Naimi, the influential oil minister of Saudi Arabia. Mr. Naimi pledged "there will be no shortage of oil," because Saudi Arabia and others in OPEC had the ability and the will to raise production to levels that might be needed. Saudi Arabia is believed to be the only country that has significant unused capacity. Yet the IEA data showed Saudi capacity to offset losses was less than many had thought. With output already at some 9.1 million barrels a day, the IEA figured Saudi Arabia can only pump an extra 400, 000 barrels of oil for March. This will rise to 600,000 barrels a day in April, and 900,000 barrels a day in May, assuming early March production levels and a buildup of capacity during the next six weeks.

Saudi Arabia's output capacity is likely to have featured in discussions the IEA's executive director, Claude Mandil, had earlier this month with Mr. Naimi in Riyadh. Mr. Mandil has promised the IEA will act swiftly to release oil from strategic stocks, if needed. But Mr. Mandil has also made clear the IEA will only act after it consults with OPEC and determines whether it needs to act because the exporters' group can't fully make up for any lost supplies.

edition.cnn.com Thursday, March 13, 2003 Posted: 0019 GMT ( 8:19 AM HKT)

LONDON (Reuters) -- Spare OPEC oil production capacity has been squeezed to just half the volume of Iraq's exports, exposing world energy markets as war looms, the International Energy Agency said on Wednesday.

In its monthly Oil Market Report, the IEA said that production increases over the past two months had left effective spare capacity in OPEC at just 900,000 barrels per day (bpd) on the global market of 78 million bpd.

"This is less than the potential loss of supply in the event of war in Iraq," said the Paris-based IEA, adviser on energy to 26 industrialised nations.

The IEA report calls into question OPEC's claims that it has some 3 million bpd to hand in case of a U.S. attack.

Iraqi supplies, running at 1.7 million bpd over the past month, are expected to shut should the United States launch an assault against Baghdad. In addition, Kuwait has said it may need to suspend as much as 700,000 bpd as a safety precaution during war.

"The market is heading into a period of heightened uncertainty with low stocks and limited spare production and shipping capacity," the IEA said.

It said commercial petroleum inventories among its member countries had been eaten away during a cold winter snap in North America.

"Industry oil stocks are tight and trending around minimum operating levels in key markets," the agency said. "A further supply disruption would tax a system operating at close to capacity."

Worries about low inventories helped push oil prices sharply higher on Wednesday. U.S. light crude for April jumped $1.11 to close at $37.82 a barrel.

Prompt action promised

The Organization of the Petroleum Exporting Countries agreed at a meeting in Vienna on Tuesday to keep production limits unchanged for the time being and said in a communique it would take prompt action if needed to ensure stable supplies.

Most of OPEC's spare capacity is held by its biggest producer Saudi Arabia, but the IEA disputed Saudi claims to be able to pump 10 million barrels a day straight away.

The agency projected Saudi capacity at 9.5 million bpd in the second half of March, giving it just 400,000 bpd spare.

Riyadh was likely to lift capacity to 9.7 million bpd in April and 10 million bpd in May, it forecast, but still short of the 10.5 million bpd Saudi says it can pump at 90 days notice.

The IEA report said OPEC's spare cushion had shrunk from 3.3 million bpd in November. It estimated production rose by 1.5 million bpd in February to 27.18 million as Venezuela restored output after a strike and others opened the taps.

The IEA has said it will allow OPEC to try to cover any shortages in war before it considers, as a last resort, releasing inventories from emergency stockpiles held in consumer nations. The agency has the power to order a release from the mandatory reserves of crude and petroleum products.

Strategic stocks built up by the IEA after the 1974 Arab oil embargo were last used in the 1990-1991 Gulf crisis after Iraq's invasion of Kuwait.

newsobserver.com By BRUCE STANLEY, AP BUSINESS WRITER

VIENNA, Austria (AP) - A surge in world oil output last month has left producer countries with too little spare capacity to fully offset a wartime halt in supplies from Iraq, the International Energy Agency warned Wednesday.

Output increased 2.5 percent worldwide in February and oil inventories tightened in major importing nations, the agency said. Fears of a U.S.-led attack on Iraq propelled prices to their highest levels since the 1991 Persian Gulf War. International oil markets are "running on empty" as war clouds gather again in the Gulf, the agency said in its monthly oil market report.

"A further supply disruption would tax a system operating at close to capacity," the report said.

The only reliable cushion for consumers may be the 4 billion barrels in strategic stocks of crude that IEA members have amassed for use in an emergency, it added.

The agency issued its grim assessment a day after the Organization of Petroleum Exporting Countries decided to leave its oil production quotas unchanged at 24.5 million barrels a day. OPEC, which pumps about a third of the world's crude, made clear that it would boost its output to try to cover any shortfall arising from a war.

The IEA is the energy watchdog of the Organization for Economic Cooperation and Development, a group of the world's wealthiest oil-importing countries.

While highlighting many causes for concern in oil markets, the IEA expects that the end of winter - the peak season for heating oil sales - will reduce demand for crude by about 1.6 million barrels a day. Such a decrease would in itself offset a loss of Iraq's current exports under the U.N. oil-for-food program, the report said.

The IEA acknowledged efforts by OPEC and independent producers to put additional crude on the market. World production rose in February by 1.96 million barrels a day to 79.41 million barrels, and OPEC contributed more than three-fourths of the increase, the agency said.

OPEC member Venezuela boosted its daily production by 850,000 barrels as its oil industry continued to recover from a crippling strike. Saudi Arabia's output grew by 330,000 barrels a day, and of OPEC's 11 members, only Iraq and Indonesia failed to pump at higher levels last month, the report said.

"If the IEA's numbers for OPEC production in February are correct, there's a lot of oil on the water that should be hitting inventories in a few weeks. That's the good news for consumers," said Adam Sieminski, an oil price strategist at Deutsche Bank in London.

Sieminski agreed that OPEC's limited amount of spare capacity could be a problem if markets suffer a serious supply disruption. Most producers are pumping all they can, and only Saudi Arabia - with the world's biggest oil reserves - has significant room to pump more.

OPEC claims to have 2 million to 4 million barrels in additional production capacity. The IEA argued that OPEC's "effective spare capacity" - the additional crude it could produce on short notice - was much smaller.

The agency said OPEC's effective spare capacity fell last month to 1.72 million barrels a day from 2.37 million barrels in January, as the cartel produced more oil to make up for the outage from Venezuela. With OPEC increasing production to cash in on current high prices, this extra capacity has probably diminished in March to fewer than 1 million barrels a day, the report said.

It warned that OPEC would therefore be unable to quickly cover a war-induced shortfall from Iraq, which produced 2.49 million barrels a day in February. If U.S.-led forces attacked Iraq during the second half of March, the IEA suggested that it would be May before OPEC could offset the shortfall.

U.S. spot prices for light, sweet crude climbed by an average of 8.4 percent in February to $35.75 a barrel, while futures prices peaked at $39.99 on Feb. 27. The average spot price of North Sea Brent, the European benchmark crude, rose by 4.3 percent to $32.67, the report said.

Projected oil demand for 2003 is 78.01 million barrels a day. A cold winter and greater industrial use of crude in Asia and North America kept demand strong in January, and seasonal demand should fall by 1.6 million barrels a day in the spring, the IEA said.

"I think that's a vast underestimate," said Kevin Norrish, head of commodities research at Barclays Capital. He argued that high crude prices are discouraging consumption and slowing economic growth.

"The risk has got to be that we'll see a very, very steep fall in demand in the second quarter," Norrish said, echoing OPEC's fears of a possible drop in prices if Iraqi exports resume quickly after a war.

On Wednesday, April contracts of U.S. light, sweet crude rose $1.00 to $37.72 a barrel on the New York Mercantile Exchange. On the International Petroleum Exchange in London, April Brent rose 51 cents to $33.80 a barrel.

www.morningstar.ca 12 Mar 03(2:20 PM) | E-mail Article to a Friend

NEW YORK (Reuters) - Oil prices jumped nearly a dollar on Wednesday as the U.S. government reported a fresh fall in fuel stocks, leaving little supply cover for looming war in Iraq.

U.S. April light crude futures climbed 98 cents to $37.70 a barrel, below its recent peak of $39.99. Oil prices set a record high of $41.15 a barrel during the 1990-91 Gulf crisis.

In London, benchmark Brent futures rose 51 cents to $33.80 a barrel.

The Department of Energy said U.S. crude inventories fell nearly 4 million barrels to 269.8 million, below the government's suggested level for smooth operations and matching a 27-year record low hit in early February.

"It shows the U.S. market is still under-supplied by about 1 million barrels per day on an average basis," said Lawrence Eagles of GNI-Man Financial.

Oil prices are up 20 percent this year on concerns that a war in Iraq could upset oil supplies from the Middle East.

With more than 250,000 U.S. and British troops ready for war, U.S. officials said Saddam had "days, not weeks" to prove he had complied with U.N. orders and given up all weapons of mass destruction.

Prices eased briefly on Tuesday after the Organization of the Petroleum Exporting Countries, which controls around 60 percent of world crude exports, pledged in Vienna to ensure adequate supplies for nervous oil markets.

Saudi Arabia has raised production sharply since the start of the year to make up for supplies lost from Venezuela during a two month workers' strike.

But the International Energy Agency, adviser on energy to 26 industrialized nations, said on Wednesday OPEC's spare oil production capacity had been squeezed to just 900,000 bpd following the recent production increases.

"This is less than the potential loss of supply in the event of war in Iraq," said the Paris-based IEA in its monthly Oil Market Report.

Iraqi output, running at 1.7 million bpd over the past month, would be expected to be halted in the event of war. In addition, Kuwait has said it might need to suspend as much as 700,000 bpd as a precaution.

"The market is heading into a period of heightened uncertainty with low stocks and limited spare production and shipping capacity," the IEA said.

U.S. gasoline supplies were also sharply lower last week according to the stock reports.

U.S retail gasoline prices are already within two cents of all-time highs. U.S. Energy Secretary Spencer Abraham has said Washington will only tap its 600 million barrels of emergency oil reserves as a last resort in the event of a severe supply disruption.

www.vheadline.com Posted: Wednesday, March 12, 2003 By: PETROLEUMWORLD

OPEC President Abdullah bin Hamad Al Attiyah said Wednesday the group's focus is now on a cut in crude oil output because he is afraid of a collapse in prices.

"What I'm afraid of in coming months with more oil in the market...is how will OPEC manage to avoid a (price) shock," he told Dow Jones Newswires.

At their output policy meeting Tuesday, oil ministers reassured markets they will pump more oil if there's demand. But many are skeptical about how much crude the Organization of Petroleum Exporting Countries and its de-facto leader Saudi Arabia can or want to pump.

OPEC, excluding Iraq, kept their current production ceiling of 24.5 million barrels a day intact.

Looming large are a US-led war against Iraq and a seasonal, second-quarter downturn in crude consumption in the Northern Hemisphere. Oil ministers will be tested BY trying to balance the two over the coming weeks.

"Now the concern is on what we'll do to cut production," Al Attiyah said.

This question was "more realistic and pragmatic" to answer than the issue of spare capacity, Al Attiyah said.

Saudi Arabia's Oil Minister Ali Naimi said Tuesday that the size of a fall in demand may not be as much as expected: "Demand may be the same. Maybe people will be building inventories. We don't know."

The International Energy Agency monthly report Wednesday stick to its second-quarter demand forecasts. It also said high oil prices, tight stock and reduced spare capacity in OPEC has left the global oil market on a knife edge, with very little flexibility to respond to further supply disruptions.

The general strike in Venezuela and fears of war in Iraq have pushed up prices and combined to reduce Organization for Economic Cooperation and Development oil stocks in January to 50 days of forward cover from 55.5 days a year ago, the Paris-based IEA said.

"A further supply disruption would tax a system operating at close to capacity," the IEA report said.

February output from all 11 OPEC members increased by 1.5 million bpd from January to 27.16 million bpd.

OPEC-10 output, excluding Iraq, was also up 1.5 million bpd on the month at 24.67 million bpd.

Output from Saudi Arabia increased 330,000 bpd to an average of 8.85 million bpd in February as the OPEC kingpin boosted supplies to cover for a shortfall in Venezuelan crude.

The IEA estimated Saudi oil output was more than 9 million bpd in the past two weeks.

Wednesday, the Kuwait News Agency reported Kuwait had begun pumping crude at full capacity of 2.4 million bpd. Kuwait's OPEC quota is 1.965 million bpd.

KUNA quoted a Kuwaiti oil official as saying the country won't close any oilfields if there's a war in Iraq.

At Tuesday's meeting, OPEC was anxious not to assume a war against one of its members is inevitable. It scheduled its next meeting three months on June 11 in Qatar, but many OPEC sources say they think they'll meet sooner.

Saudi's Naimi said OPEC must hold an emergency meeting in the event a US-led war breaks out in Iraq, Arabic al-Hayat newspaper reported Wednesday. "If the war occurs, God forbid, then OPEC as a responsible organization must convene and look into the market situation," Naimi said.

The oil markets are unconvinced OPEC can or will pump significant volumes of extra oil into the market to calm prices. For that reason, markets are focused on international events and whether the US and the West's energy watchdog, the IEA, will release their massive reserves.

OPEC's basket of seven crude oils averaged $32.54 a barrel Tuesday, compared with $33.11/bbl Monday.

At 1411 GMT, European benchmark April Brent crude futures on London's International Petroleum Exchange were trading down 23 cents at $33.06/bbl, while April US light sweet crude trading on New York's Mercantile Exchange was down 39 cents at $36.33/bbl.

By Adam Smallman, Dow Jones Newswires; 44-20 7842-9262; adam.smallman@dowjones.com

(Selina Williams in London and Sally Jones in Vienna contributed to this article)