OPEC To Continue Oil Flow Restraints

OPEC on Thursday agreed to maintain severe restraints on oil production for the fourth quarter to keep crude prices riding high.

The Organization of Petroleum Exporting Countries left supply limits unchanged despite worries among consumer nations about the impact of high energy costs on the world economy.

Cartel cutbacks, in place since January, have combined with the threat of a U.S. war against Iraq to push benchmark U.S. crude close to $30 a barrel — a setback for industrialized powers trying to sustain a shaky economic recovery.

Consumers including the United States have worried tight supplies heading into the peak demand season could make oil cost even more, but many in OPEC think prices have been pushed higher by fears President Bush will attack Iraq in an effort to topple President Saddam Hussein — not by any imbalance in the market.

"Prices are OK for producers and consumers," insisted Saudi Oil Minister Ali al-Naimi. "This is not a decision we took lightly. We had to take account of many uncertainties including Iraq."

Producers will meet again on December 12 to review policy for the first quarter of next year, by which time any U.S. plans for military action may be clearer.

The so-called "war premium" is believed to have inflated oil by $2 to $4 per barrel, but some in OPEC noted that prices slid earlier in the week when Iraq said it would readmit U.N. weapons inspectors. Prices have since crept back up as it became clear OPEC would probably not boost output for now.

Kuwait expressed concern Thursday that Iraq might attack its oil fields if Washington were to wage war on Saddam. When U.S.-led coalition forces pushed Iraqi troops out of Kuwait in the 1991 Persian Gulf War, the retreating Iraqis destroyed oil facilities and sabotaged numerous wells by setting them on fire.

"We have our history for that — we always worry," said the acting Kuwaiti oil minister, Sheikh Ahmed Al Fahd Al Ahmed Al Sabah. "I believe and I know that Saddam can do it because he did."

Even in the event of war it seems there is no guarantee they will step in to prevent a price spike.

"I don't think so," said price hawk Libya's representative Abdulhafidh Zlitni. "OPEC intervention to correct prices will only happen when there is serious threat to supply."

"If we are sure the price is not due to fundamentals we are not obliged to act," OPEC President Rilwanu Lukman told a press conference.

"Oil market fundamentals will continue to strengthen over the next few weeks but prices will also be determined by the war risk premium and that will depend on how loud the war drums are beating," said consultant Gary Ross of New York's PIRA Energy.

"At the margin the world economy is fragile enough that higher prices could have a very real impact."

An existing OPEC formula, adding more oil if prices stay above $28 for the basket, equivalent to about $30.50 for U.S. crude, for 20 consecutive trading days, could provide the trigger for more oil, said the UAE Oil Minister Obeid al-Nasseri.

Thursday's accord among the Middle East-dominated cartel came despite Saudi misgivings about heavy leakage over production quotas.

Lukman admitted members were pumping about 1.8-2.0 million barrels a day above official limits of 21.7 million bpd for 10 countries.

Delegates said Saudi had argued on Wednesday that ministers should consider a cosmetic increase in quotas to bring official limits more closely in line with real supplies.

Riyadh is worried that the leakage undermines OPEC credibility on world markets but ironically, said delegates, it was the prospect of higher Iraqi exports in the short-term that persuaded Saudi to go along with the majority.

Iraq this week started negotiating export contracts with Western oil majors under the U.N. oil-for-food program for the first time in two years.

Baghdad's exports, limited by only minor contracts with shady middlemen firms, now are expected to increase.

Analysts said many in OPEC also were opposed to an increase because they are pumping at, or near, capacity. Saudi, by contrast, has large volumes to spare and would rather not shed more market share to rivals like Russia — one of a crop of non-OPEC suppliers rolling out extra barrels this year.

"The countries that didn't want to increase quotas don't have spare capacity," said PIRA's Ross.

"Venezuela, Indonesia and Kuwait are at full capacity and Qatar and Iran have very little extra."

Many market analysts think fourth quarter demand growth alone could prove sufficient to send prices back above $30 a barrel.

Despite OPEC quota-cheating, production still has not been high enough for the normal stock-building seen during the third quarter. Crude inventories in the United States, easily the world's biggest importer, are running about four percent lower than a year ago.

"They are not low enough to be of concern," said Saudi's Naimi.