Opec hesitates as harmful oil price spike threatens

Oil is at $30 a barrel, war drums are beating and world economic recovery is hanging in the balance.

It might look like the perfect recipe for Opec to ride to the rescue at Thursday's meeting of the oil cartel in Japan by raising output limits to stop a damaging crude price spike.

Many in the Organisation of the Petroleum Exporting Countries have other ideas.

Consumer nations want to prevent a rise in energy costs hurting fragile economic recovery but most in Opec are loth to put at risk a successful three-year strategy of supporting high prices with stiff production restraints.

Typical of hawkish sentiment is the view of Qatari Oil Minister Abdullah al-Attiyah. "There is no supply shortage - on the contrary, the market is saturated with more than enough oil supplies," he said.

Economists say the cost of higher oil prices, up nearly 50 per cent since January to $29.82 a barrel for US crude on Friday, hits consumers and companies alike.

"There is no doubt the rise in oil prices this year is negative for the world economy," said Kiichi Murashima, economist at Nikko Salomon Smith Barney in Tokyo. "It works as a kind of tax on the economy. Consumer income is squeezed and so is corporate profit."

Importing nations can only hope that Saudi Arabia decides to use its unrivalled weight in Opec to head off the threat of higher prices over the northern hemisphere winter.

Powerful enough to bulldoze through a change in policy against majority opinion, Saudi has yet to reveal its hand.

As it ponders policy, rarely has the world's biggest exporter felt more keenly the dilemma of supplying reasonably priced oil to friendly powers while trying to contain anti-Western dissent at home.

So soon after the anniversary of the September 11 attacks, blamed mostly on Saudi nationals, Riyadh will be reluctant to anger Washington by allowing crude prices to get out of hand.

And it is eager not to shed more market share to rivals like Russia - one of a crop of non-Opec suppliers rolling out extra barrels this year.

Behind the scenes last month Riyadh began pushing for a modest Opec increase of about one million barrels daily, still leaving most of the five million barrels a day of cutbacks in place since January.

But it has hesitated in the face of heavy opposition and now a Gulf official familiar with Saudi thinking says only that it will "look for common ground" at the September 19 conference.

Some traders are reading that to mean that Saudi will go along with the pack, leave output unchanged and settle for another meeting to review policy before the end of the year.

Consumer countries represented by the International Energy Agency, Paris-based adviser on energy to 26 industrialised nations, are in no doubt that more oil is needed this winter.

"Regardless of a war premium, there is supply pressure which calls for additional oil," said the agency's Executive Director Robert Priddle. "We are concerned about adequate supplies through the winter."

Many independent analysts agree. Opec restraints stopped crude stocks building as they do normally during the third quarter and a big stockdraw is forecast in the fourth.

"Crude oil inventories are falling alarmingly and they have still got downwards momentum behind them," said analyst Paul Horsnell of JP Morgan.

Opec's own forecasters have a far more benign winter outlook. Cartel economists who met last week see room for only 25.6 million barrels a day of Opec oil on average over six months from October to end-March, versus output now of 25.4 million - no room for an increase.

The threat of a war on Iraq by the United States to remove Iraqi President Saddam Hussein helps provide convenient cover for those in Opec who want to leave production unchanged.

They argue there is about a $5 "war premium" in the current $30-a-barrel US price that values an Opec basket of cartel crudes near the top end of the group's $22-$28 target.

Saudi Oil Minister Ali al-Naimi has to decide whether to argue that, for the sake of credibility in sceptical world oil markets, Opec needs to raise production quotas to bring official limits closer to actual supply.

Cheating is running at two million barrels above official limits of 21.7 million barrels a day for 10 member countries, more than enough to absorb any modest increase in quotas.

"It would make sense to legitimise some of the cheating with higher quotas but the worry for Saudi would be that by raising quotas they license extra leakage," said oil dealer Nauman Barakat of Fimat International Banc in London.

"Everyone would make a ritual commitment to stick to quota and then look at each other and think 'he's going to cheat more, so I'd better cheat more first'."

That Opec is meeting in Japan, a major buyer of Opec oil, ahead of a September 21-23 conference with oil consuming nations, at first sight might make it appear more likely for it to meet consumer demands for more crude.

"On the other hand, Saudi might decide it's best to avoid a quarrel and present a united front, even at the risk of higher prices," said Barakat.