OIL: Expectations Surrounding Iraq, Venezuela Keep Prices High

By Humberto Márquez Reprint | | Print |

Humberto Márquez

CARACAS, Jan 24 2003 (IPS) - Oil prices dropped slightly Friday after reaching their highest levels in two years this week, in a market that is closely following the political crisis in Venezuela and expectantly awaiting the report that the United Nations inspectors in Iraq are to present next Monday.

International benchmark North Sea Brent closed Friday in London at 29.76 dollars a barrel, after trading at the start of the day at 29.95 dollars. On Thursday it closed at 31.72 dollars, after nearly rising to the 33 dollar mark, which was last seen in early 2001.

West Texas Intermediate fluctuated Friday in New York between 32.25 and 32.75 dollars a barrel, rallying slightly from the levels of the past two days, but still a far cry from the 35.20 dollars a barrel seen early this week, the highest price registered in two years.

The Organisation of Petroleum Exporting Countries (OPEC) reference basket traded at an average of 31.05 dollars a barrel this week, 27 percent higher than the 2002 average price, the Venezuelan Energy Ministry reported.

”Not much more can be done to curb the rise in prices under the current circumstances, but the market is well-supplied,” said Alvaro Silva, secretary-general of OPEC, which is made up of Algeria, Kuwait, Indonesia, Iran, Iraq, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Not including Iraq’s output, OPEC officially puts 23 barrels a day of crude on the market, and will add 1.5 million additional barrels as of Feb. 1 to meet part of the global demand, which already surpasses 77 million barrels a day.

To that must be added the unofficial production of several OPEC members that exceed their quotas, estimated by independent sources at over one million barrels a day.

In addition, 2.4 million barrels a day are produced by Iraq, outside of OPEC’s quota system, as part of a food-for-oil programme put in place by the United Nations as an exception to the embargo imposed after Baghdad invaded Kuwait in 1990.

The thirst for oil is fuelled by the threat of a United States military attack against Iraq, which could also affect the oil exports of neighbouring Middle East countries.

Another major ingredient in the rise in global demand for oil is the possibility that the nearly two-month general strike in Venezuela and walkout by executives and managers of the state-run oil company PDVSA, aimed at toppling President Hugo Chávez, will continue.

Those two factors could deprive the market of up to five million barrels of oil a day.

Observers warn that the cocktail of instability in Venezuela and the Persian Gulf region could drive oil prices above 50 dollars a barrel.

The caution shown by the markets towards the end of the week was a result of the expectations generated by the report that the UN weapons inspectors in Iraq are due to present to the UN Security Council next Monday.

A communique issued by the Venezuelan Energy Ministry attributed this week’s rise in prices to the tense situation in the Middle East, ”speculative maneuvers on the futures market,” and concern over the political crisis in this South American country.

Indonesia’s Energy Minister Purnomo Yusgiantoro urged the members of OPEC to boost production in order to ensure supplies to the market, because the current prices of over 30 dollars a barrel are simply ”too high.”

However, OPEC President Abdullah bin Hamad Al-Attiyah, Qatar’s oil minister, said most exporters are already producing at maximum capacity.

OPEC will debate whether to open its spigots further, at a meeting scheduled for Mar 11, if prices still remain high by that time. But that will depend on the capacity of each member, Al-Attiyah told the World Economic Forum, which opened Thursday in the Swiss resort town of Davos.

Experts say Saudi Arabia, which officially produces 7.5 million barrels a day and will be pumping more than eight million starting on Feb. 1, could increase its output by around two million barrels a day on short-term notice.

A recent New York Times editorial stated that ”this month’s most notable stimulus plan for the American economy did not emanate from Washington but from Vienna.”

The Austrian capital is the headquarters of OPEC, whose leading producer as well as other members with large reserves are in favour of checking the rise in prices by boosting output, in order to help the global economy recover and thus ensure long-term demand.

The New York Times noted that China, which ”will soon become the world’s second-largest oil importer” and currently depends heavily on oil from the Middle East, has also become a player in the balance of power in the Persian Gulf region.

”That the Saudis and other Middle East producers have had to come to America’s rescue in the wake of Venezuela’s political crisis is rich in irony. Venezuela was counted on as a buffer against disruptions in deliveries from the Persian Gulf,” the editorial added.

The broad opposition coalition demanding that President Chávez step down declared the stoppage on Dec. 2 that has paralysed oilwells, refineries and pipelines, and severely cut deliveries.

Last November, Venezuela’s output of crude stood at 2.8 million barrels a day, including exports of 2.5 million. But in December production crashed, and the country was forced to actually import fuel supplies.

The irony to which The New York Times alluded is that it was not the populist, nationalistic, left-leaning Chávez who drastically reduced the 1.5 million barrels a day in exports to the United States, but the neo-liberal right-wing opposition movement, which identifies much more closely with the positions taken by Washington.

The former PDVSA executives and managers who are heading the oil industry walkout admitted that Venezuela’s production of crude has recently begun to recover, albeit slowly. They said it stood at 800,000 barrels a day this week.

But the Chávez administration claims that production currently tops one million barrels a day, and that it will increase to twice that next month as the government gradually gets oil industry infrastructure operating again.

The markets, however, are not responding quickly to that recovery, because even an end to the shutdown would not mean an immediate return to pre-strike levels of production, said Michael Rothman, an analyst with Merrill Lynch.