LONDON: By boosting production ahead of the war in Iraq, the Organisation of Petroleum Exporting Countries (Opec) succeeded in allaying concerns about a possible oil shortage once the shooting began. Yet, instead of celebrating its achievement, Opec fears that the world is now awash in crude and at risk of a ruinous price crash.
The cartel has called an emergency meeting for Thursday to assess post-war conditions in the oil market, with a view to slashing output to bolster sagging prices. Opec president Abdullah Hamad Al Attiyah has said he believes the world is over-supplied by two million barrels a day at a time when seasonal demand normally slips to its lowest level of the year.
However, energy analysts warn that crude inventories in major importing countries are still alarmingly low. They argue that Opec must be careful not to curb production so much that refiners face low stocks of oil as they head into summer, the peak season for petrol consumption.
“This whole idea that there is a tidal wave of over-production that’s going to sink prices is just wrong,” said Adam Sieminski, oil price strategist at Deutsche Bank here. “Inventories are extremely low, and Iraq is not producing, so there is no over-production.”
Opec has timed its meeting in Vienna to assess market conditions in the immediate aftermath of the Iraq war. This won’t be easy, and some analysts argue that such a meeting is premature.
No one knows when Iraq, historically a large producer, will be able to resume its crude shipments. Nigeria and Venezuela, meanwhile, are still clawing their way back to production levels they enjoyed before social unrest and a national strike, respectively, dented their output.
Yet Opec, which pumps about one-third of the world’s oil, is eager to show that it is in control of – or at least closely monitoring – a tempestuous market.
Opec members agreed in January to a production target of 24.5 million barrels a day. But they soon were busting their quotas, to profit from the high prices preceding the war as much as to reassure markets that supplies would be plentiful despite any hostilities.
Opec earned plaudits from the US and other importers for its pro-active, and unofficial, production increase. By some estimates, Opec’s 10 members excluding Iraq were pumping an average of 26.2 million barrels a day last month – 7% above their quotas.
But oil prices tumbled as the conflict unfolded. By the time the fighting was over, futures contracts of US light sweet crude had fallen by more than one-third, from a high for the year of US$39.99 a barrel reached on Feb 27.
Opec is worried that prices may have farther to fall.
“I do not think there is any necessity for Opec to carry on with its excess production. We should consider a cutback in production to balance supply and demand, especially in the second quarter,” Iranian Oil Minister Bijan Namdar Zangeneh said. – AP