reuters.com Wed March 12, 2003 05:32 AM ET By Richard Mably

LONDON (Reuters) - Spare OPEC oil production capacity has been squeezed to just half the volume of Iraq's exports, exposing world 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 now of just 900,000 bpd on the 78-million-bpd global market.

"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 industrialized nations.

Iraqi supplies, running at 1.7 million barrels a day 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.

The cold spell in the United States this winter cut commercial inventories by the end of January among its member countries to 50 days of forward demand, five days less than a year ago, the IEA said.

Its report calls into question OPEC's claims that it has some three million barrels a day to hand in case of a U.S. attack.

The cartel agreed at a meeting 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.

The pledge was received well on oil markets and crude prices fell. U.S. light crude on Wednesday was off another 42 cents at $36.30 a barrel.

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 barrels daily 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.

www.nytimes.com By NEELA BANERJEE

IENNA, March 11 — The Organization of the Petroleum Exporting Countries decided at its meeting here today to maintain oil output at current levels, indicating that it could do little else to cope with the uncertain effect a possible war in Iraq could have upon supplies from the Persian Gulf and global demand.

At its last meeting in January, OPEC raised production levels to 24.5 million barrels a day. But industry analysts say OPEC is producing more than that, with nearly all countries, except Saudi Arabia, pumping at maximum capacity to calm a market shaken the last few months by export shortages from Venezuela and jitters over war.

The president of OPEC, Abdullah bin Hamad al Attiyah of Qatar, acknowledged that although the 10 voting OPEC members were taking a wait-and-see approach, the group was prepared to act quickly to produce even more oil within weeks to prevent supply shortfalls and steep jumps in prices.

"We will closely monitor market developments," Mr. Attiyah said at a news conference after the meeting, "and take prompt and appropriate action as and when the need arises."

OPEC does not disclose its actual production. Mr. Attiyah and others would say only that the group's excess production capacity is two to four million barrels a day above the official quota. It is unclear how much of that has already been tapped, though most industry analysts estimated that perhaps only a million barrels a day of spare capacity remained within OPEC, nearly all of it in Saudi Arabia. There is negligible spare capacity outside OPEC, analysts said.

OPEC scheduled an extraordinary meeting for June 11, to be held in Doha, Qatar, rather than at its Vienna headquarters. But Mr. Attiyah said that if war in Iraq touched off an emergency in oil markets before June, OPEC members would confer by telephone or convene another meeting.

Right now, OPEC's most obvious challenge is an oil price that is so high that it could cripple the global economy and weaken demand. Crude oil for April delivery closed at $36.72 a barrel on the New York Mercantile Exchange, an increase of 42 percent from four months ago, when the general strike in Venezuela began and its oil exports were suspended.

Mr. Attiyah said that while OPEC was doing all it could to rein in high prices, the trend was essentially out of the group's control. He and other oil ministers said there was enough oil on the market, but that prices had been buoyed by fears of war, which added a premium to the price of oil that OPEC members have estimated as $5 to $8 a barrel.

"The price today is being driven more by psychological forces," Mr. Attiyah said. "I wish we had the power to freeze prices at $25, but it is out of our hands."

Industry analysts said that OPEC was reaping a volatility in oil prices born of its aggressive cuts in output throughout 2002. "Prices are driven by fundamentals that were created over a 12-month period," one senior oil trader who insisted on anonymity said, explaining that low commercial stocks of oil and petroleum products in the United States were a result of OPEC's export reductions last year.

"It's very good to have a management system to bolster prices, but it can get out of hand, and it did get out of hand," the trader said.

If prices are rising beyond OPEC's control, the only other way to halt an upward spiral would be for Europe, Japan and the United States to release oil from their strategic stockpiles, which total about one billion barrels. But OPEC and the United States both indicated today that such a decision remained distant and would be made to address an oil shortage, not a run-up in prices.

United States Energy Secretary Spencer Abraham, who was in Vienna this week to talk to officials at the International Atomic Energy Agency, met late today with the Saudi oil minister, Ali al-Naimi, and later praised OPEC.

"If OPEC would cover any shortage, we would welcome that," Bloomberg News reported him as saying. "We will only draw on the Strategic Petroleum Reserve if there is a severe supply disruption."

While prices have remained stubbornly high despite OPEC's efforts, the group fears that they could fall rapidly and far too steeply, depending upon what happens in Iraq. And OPEC must be ready for that possibility, its members said. If a war in Iraq is brief, and there is little damage to its oil sites and only a short suspension of its exports, the nervousness in the oil markets could fade and prices could decline.

Some members worry that such a decrease could be accelerated if demand for oil falls about two million barrels a day in the second quarter, as has historically occurred. But OPEC has little choice but to wait to react to such a trend, rather than try to head it off. "There is no doubt that demand in the second quarter will fall," said Chakib Khelil, Algeria's minister of energy. "In a normal situation, we would lower supply. But this isn't a normal situation."

www.zwire.com ASSOCIATED PRESS March 11, 2003

VIENNA, Austria (AP) - OPEC members agreed Tuesday to stick with their current crude oil production quotas but pledged to boost output in the future to keep supplies flowing in case of any serious disruption.

Representatives of the Organization of Petroleum Exporting Countries ruled out formally raising output now as a way of reassuring nervous markets before any U.S.-led attack on Iraq.

However, they took extreme care not to mention such a conflict as a likely source of disruption, apparently afraid of seeming to support such a war simply by preparing to respond to its possible impact on markets.

Despite sharply higher oil prices, OPEC members argued that the world has enough crude to meet demand and blamed Middle East tensions for causing fears of a possible shortage.

"We are studying the market and keeping abreast of it," Saudi Arabian oil minister Ali Naimi told reporters. "There is no shortage of supply, the market is in balance, there is plenty of oil and there is a commitment to do our best within our capabilities, which we think are enough to satisfy any possible 3/8shortage in the market for whatever reason."

OPEC's president, Abdullah bin Hamad Al-Attiyah, confirmed that it was not changing its output target of 24.5 million barrels a day. Delegates planned to meet on June 11 in Doha, Qatar, to review market conditions, he said.

OPEC officials announced their decision after meeting for two and a half hours at the group's headquarters in Vienna, Austria. OPEC pumps about a third of the world's crude.

Markets worry that a conflict with Iraq would halt that country's 2 million barrels in daily exports. The impact on supplies and prices of crude could be more severe if fighting spread beyond Iraq's borders.

"The international political tensions have, without any doubt, reduced OPEC's influence on prices," Al-Attiyah said in a speech to delegates at the start of their meeting.

He added that OPEC must make a plan to cope with "any radical change in market conditions which may result from developments in the Middle East." This was as close as OPEC's official proclamations went to mentioning a war against Iraq, one of its founding members.

Algeria's oil minister Chakib Khelil said the group could produce an additional 2-4 million barrels a day in an emergency. An expected drop in seasonal demand in the spring should also help ease pressures on supply, he said.

However, many OPEC members are already pumping all they can to profit from prices that are near 12-year highs, and it is unclear how much more oil OPEC could produce even if it wanted to.

The U.S. Energy Administration reported last week that OPEC's spare production capacity, excluding Iraq, was no more than 2 million barrels a day. That would give the group just enough extra barrels to cover a disruption in Iraqi supplies but no more.

Bill Edwards, an independent energy consultant from Houston, argued that OPEC has "zero" ability to raise output from current levels.

"I think they're producing all they can of the crude that refiners want," he said.

At least one OPEC oil minister - Obaid bin Saif Al-Nasseri of the United Arab Emirates - acknowledged that it would be difficult for the cartel to cover a bigger supply disruption that included any of Iraq's neighbors such as Kuwait, where thousands of U.S. troops are poised to attack Iraq.

Al-Nasseri's comments on Monday suggested that the United States and other major oil-importing countries might need to rely on their own strategic petroleum reserves. The U.S. alone has a strategic petroleum reserve, or SPR, of 600 million barrels.

"OPEC is working flat out to make sure the market is supplied," said Raad Alkadiri, an analyst at The Petroleum Finance Co., a Washington consultancy.

Alkadiri agreed that the group would be hard-pressed to cover a dual shortfall from Iraq and Kuwait.

"If there are any signs of supply disruptions beyond Iraq's borders, then I think we'll see use of the SPR fairly quickly," he said.

U.S. Energy Secretary Spencer Abraham, in Vienna for an International Atomic Energy Agency meeting, appeared to confirm that view.

Asked at a news conference whether the U.S. government would release oil from its strategic reserves, Abraham told reporters: "We are prepared to act very quickly, but only if we believe a severe disruption of supply exists."

The United States and other major importing countries want OPEC to maximize its production if a war threatens supplies. Abraham planned to meet later Tuesday with Saudi Arabia's Ali Naimi.

April contracts of U.S. light, sweet crude fell 55 cents to close at $36.72 a barrel. At the International Petroleum Exchange in London, April Brent fell 39 cents to close at $33.30 a barrel.

ogj.pennnet.com By an OGJ correspondent

VIENNA, Mar. 11 -- Members of the Organization of Petroleum Exporting Countries agreed Tuesday to maintain their current oil production quotas, ruling out any formal or informal increase in output as a means of calming rattled markets.

Earlier suggestions that OPEC might suspend output quotas altogether were not even discussed during the meeting, said OPEC Pres. Abdullah bin Hamad Al Attiyah.

The decision to keep existing output quotas had been anticipated by some financial analysts. Jefferies & Co. Inc. in New York said Monday, "We expect the cartel to maintain the current production quota of 24.5 million b/d for the OPEC-10 (excluding Iraq) and (to) state that the members will boost production in an effort to replace lost production if Iraqi oil production stops."

At the close of the 1-day meeting, Al Attiyah said OPEC remains prepared to increase production if necessary.

Speaking at a press conference following the 2.5 hr meeting of ministers, Al Attiyah acknowledged that world oil prices are high, saying that stemmed from speculators and not from any shortage of oil supplies.

"We speak to our customers all the time, and they have not expressed any shortage to us," he said, adding that the organization is closely monitoring market supply and demand.

As added assurance, he said, OPEC ministers will meet June 11 in Doha, Qatar, to reassess the situation. Meanwhile, he said, members would confer on a regular basis or could easily meet again before that date, if necessary.

"I think we are still efficient. It took just 3 days to convene our last extraordinary meeting in February," said Al Attiyah.

His upbeat attitude was in marked contrast to a statement issued before the meeting in which he said that OPEC was not in a position to control the world oil price. "The international political tensions have, without any doubt, reduced OPEC's influence on prices," Al Attiyah said. But he insisted, "We can still have an impact on the market."

He said member ministers would carefully review the market and would decide what measures to adopt "in the interests or order and stability." But he warned that the review would be "more complicated than usual because the near-term outlook is dominated by political factors over which OPEC has no control."

The average price for OPEC's basket of seven benchmark crudes lost 68¢ to $33.11/bbl Monday (OGJ Online, Mar. 11, 2003). However, that basket price has averaged $31.08/bbl so far this year and has remained above OPEC's targeted level of $22-28/bbl since late last year, despite the group's previous pledge to take action if market prices remained above or below the target level for extended periods.

Jefferies on Monday raised its 2003 price forecasts to an average $29/bbl for benchmark West Texas Intermediate crude and $5/MMbtu for natural gas at Henry Hub. That's up from its earlier projections of $25/bbl for oil and $4/MMbtu for gas.

"The keys to our higher forecast include bullish US and worldwide crude inventory levels, our belief that OPEC will remain a cohesive unit for the foreseeable future, and the difficulties non-OPEC producers are experiencing expanding production," Jefferies analysts reported.

"Although it is certainly a difficult time to pinpoint near-term oil price movements due to the Iraq situation and strike-induced fluctuations in Venezuela crude, the underlying principles that drive crude prices are solid, in our view," the analysts said.

www.newsmax.com NewsMax Wires Wednesday, March 12, 2003

LOS ANGELES -- Crude futures settled 55 cents lower on the New York Mercantile Exchange Tuesday after OPEC announced it would keep the world supplied with oil should "geopolitical tensions" deteriorate further.

While not mentioning its fellow OPEC member Iraq by name, the cartel repeated its pledge that it would be able to continue production and the flow of supplies to its customers at the conclusion of its latest conference meeting in Vienna.

"In addition, noting the uncertainties stemming from increasing geopolitical tensions and while expressing its hope that peace and tranquility will prevail, the conference reiterated OPEC's determination to ensure that the market remains stable and well-supplied," OPEC said in a statement.

"The organization (has) repeatedly demonstrated its ability and willingness to continue to satisfy oil market demands in a timely fashion."

OPEC refused to withhold oil from the West in a show of support for the increasingly beleaguered Iraqi government. It also refused to increase exports from its current level of 24.5 million barrels per day to help cool off oil prices that have helped send gasoline prices in the United States to near-record levels.

News Cools Market

The news from Vienna and reports that the Bush administration might be willing to extend the proposed March 17 deadline for Iraqi disarmament combined to cool off the bullishness on NYMEX, where April crude settled at $36.72 per barrel while May settled at $35.74. Early after-hours trading Tuesday evening saw crude as largely stable.

A chronic tightness in the U.S. crude and gasoline supply has combined to push the average price of a gallon of regular in the United States to $1.702, according to AAA, whispering distance from the May 2001 record of $1.718.

"Motorists also should resist the urge to immediately buy gas following a possible declaration of war on Iraq or the commission of a terrorist act, because 'panic buying' and long gas lines have the potential of causing needless fuel shortages," AAA spokeswoman Dawn Duffy suggested.

OPEC's statement maintained, however, that there was no physical shortage of oil on the market and the recent run-up in prices was primarily the result of oil trader worries over the Iraq situation, cold weather in the United States and the continuing labor dispute that has bogged down Venezuela's state-run oil industry.

Uncertainties

"The current high price levels ... are predominantly a reflection of uncertainties resulting from prevailing geopolitical tensions," OPEC said. "In light of the supply-demand picture for the balance of the first quarter and the second quarter, the conference decided to maintain, for the time being, the current OPEC production ceiling. Supplies are adequate to meet current market requirements."

OPEC's ability to keep its pledge depends a good deal on whether the war spills over into Kuwait, Saudi Arabia and other Gulf nations.

The Washington Times said Tuesday that al Qaida might be forming terrorist squads to attack Kuwaiti and Saudi oilfields in the event of war.