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OPEC: Organization Sends Mixed Signals On Oil Production

As war worries rise, the Organization of Petroleum Exporting Countries is sending conflicting signals about raising or lowering output to anticipate world demand and keep prices in line. While consumers fear shortages, producers are already planning for a postwar price plunge, and Russia is struggling with huge unsold inventories of oil.

Boston, 5 February 2003 (RFE/RL) -- Less than a month after agreeing to raise oil output by 6.5 percent, the Organization of Petroleum Exporting Countries (OPEC) is already talking this week about possible cuts.

In a series of confusing signals over the last several days, the president of the OPEC oil cartel, Abdullah bin Hamad al-Attiyah, said the 11-nation group could speed up production or decide to reduce it in March.

Speaking in Abu Dhabi on 1 February, al-Attiyah said OPEC members could raise oil supplies further if needed, although there seems to be no worldwide shortage, the Qatar News Agency reported.

Then on 3 February, al-Attiyah said OPEC could move in the opposite direction at a meeting on 11 March to lower production, "Gulf News" reported. Analysts say that the coming of spring weather normally brings a drop in oil demand, while production in troubled Venezuela is gradually rising as a general strike there winds down. In such an uncertain environment, OPEC is worried that prices could plunge.

Al-Attiyah, who is the Qatari energy minister, said, "If we see any sign of a fall in oil prices, we will correct the situation." Some experts have warned that oil prices could slip suddenly to below $20 per barrel from more than $30 now.

Two weeks ago in Doha, al-Attiyah again gave a contradictory signal, saying OPEC could raise output at its scheduled March meeting. At the time, he complained that the market had ignored the cartel's decision on 12 January to hike production by 1.5 million barrels per day, leaving world prices too high. At the time, he said, "All options are open," AFP news agency reported. Since then, it appears that no option has been closed.

The reason is that both OPEC and the market are swamped with conflicting signals. Among them are a war with Iraq that may or may not happen, the strike in Venezuela that may be broken, and a dip in seasonal demand at a time when many countries are cramming to fill their strategic petroleum reserves. The combination of factors has made the market perilous to predict.

Analysts are also coming up with new combinations of possible outcomes within each variable, further complicating their forecasts. Most have to do with the dangers of Iraq.

This week, the Washington-based consulting firm PFC Energy outlined three possible outcomes for Iraqi oil production if a conflict breaks out in late February or March.

If the fighting ends quickly with no damage to the country's oil fields, Iraq could resume its recent production level of 2.5 million barrels of oil per day by May or June in the best case, PFC said. The "baseline case" includes some minor damage to oil facilities with recovery to prewar levels in November or December. But the worst case includes extensive damage, perhaps caused by mining of the oil fields, leaving Iraq with only 1 million barrels per day at the end of the year.

Others see the possibility of even worse consequences. Dow Jones Newswires quoted Mark Baxter, director of the Maguire Energy Institute in Houston, Texas, as saying that if Iraq attacks Kuwait, it would take a combined 5 million to 6 million barrels per day off the market, or 7 percent of world output. The range of possible outcomes makes any OPEC decision a matter of guesswork. In the past week, published forecasts have pegged future oil prices from as little as $10 to more than $80 per barrel.

The situation has also highlighted the problems for producing countries like Russia, which are highly dependent on oil income and less flexible than some OPEC members like Saudi Arabia. The output from Russia's Siberian oil fields cannot be easily turned on and off like those in the Persian Gulf.

Russian Finance Minister Aleksei Kudrin said the country's budget this year is based on the assumption that oil prices will average $21.50 per barrel, Interfax reported. On 1 February, Kudrin told reporters in Khanty-Mansiisk that he does not expect prices to fall sharply, but he did not explain his reasons for confidence.

Mikhail Khodorkovskii, president of Russia's giant Yukos oil company, disagrees, arguing last month that prices will soon sink to below $20 per barrel.

Khodorkovskii seems more worried about the prospect of low prices than he was a year ago, when Russian oil companies were ready to take on OPEC in a price war for world market share. At the end of 2001, oil was already trading below $20 per barrel and was fighting off threats to slide as low as $10. But Moscow's priority was to increase production, despite the low returns. It largely succeeded. Russia's oil output rose 9 percent last year.

One reason for Russia's greater worry over low oil prices is that it has yet to deal with the consequences of its success. In January, Russian oil output rose to a record post-Soviet high of 8.07 million barrels per day, but a backlog of oil on the domestic market is also rising toward record levels.

This week, LUKoil Vice President Leonid Fedun warned that bottlenecks and conflicts between private Russian oil companies and the state-controlled pipeline monopoly Transneft will trap up to 131 million barrels of oil inside Russia by November, "The New York Times" reported. The Moscow-based United Financial Group also estimated that Russian domestic oil inventories have already risen 14 percent to 165 million barrels in the past four months as prices plummet.

But Russia may also be less confident about weathering the worries over oil prices this time because it has far less control over events in the market than at this time last year. The outcome of real war is even less certain than a price war, and Russia's companies have already invested to produce even more oil.