June 24, 2003	Tuesday	Rabi-us-Sani 23,1424

DHAHRAN, June 23: Small crude deliveries from Iraq have finally begun to take place. The Organization of Petroleum Exporting Countries (Opec), in order to ensure that the market oil prices do not collapse, has been pumping on an average of 25.4 million barrels per day. This was because of the cuts in output made by the Opec’s kingpin Saudi Arabia and other producers.

A 12 per cent cut in the crude output was made by Saudi Arabia in June, and other Gulf producers Kuwait and the United Arab Emirates followed suit, bringing the output down by 1.84 million bpd in June.

Analysts feel that the action by the Opec producers has helped stabilize the prices in the upper half of the Opec price band. Despite various predictions that in the aftermath of the war on Iraq, the Opec would lose much of its control over the oil markets, it seems that the organizations is able, at least for now, to keep a close tab on the global oil markets. They have been playing their cards deftly and sensibly, many in the oil circles strongly feel.

Some people were taken aback by Opec’s decision, taken in its previous meeting, to maintain its output levels. They thought the decision would cause the global oil prices to crash. However, that did not happen and there were reasons for that. When Opec decided not to cut back its production, it was based on solid market analysis.

Now the twin targets of restoring Iraq’s oil output to 1.5 million bpd by the end of July and of re-establishing the pre-war production capacity of 2.5 million bpd by the end of 2003 seems unachievable. The Iraqi Ministry of Oil, at least for now, seems more interested in meeting domestic needs for LPG and gasoline than for sustained oil exports. The recovery in Iraq’s oil production is, therefore, likely to be far slower than had been expected at the end of war, the CGES commented in its Monthly Oil Report for June.

Iraqi officials earlier this week said that production by mid- July would only be 1 million barrels per day to 1.2 million bpd, due to continued looting and technical snags, against the target of 1.5 million bpd.

The CGES report said that the lawlessness may delay the resumption of significant volumes of oil exports until the third quarter of the year and perhaps even later, if the recent explosion on the Iraq-Turkey pipeline proves to be the start of a campaign to disturb the country’s export infrastructure.

Hence the Opec decision to keep its output level, for the time being, was apparently based on the premise that the speed of Iraq’s return to oil export would be slow and lengthy than earlier anticipated. It seems however, that Opec would face downward pressure on oil prices in the medium term rather than short term. At that point the Opec would be required to either sacrifice market share or accept a lower range of oil prices, analysts feel.

The underlying level of global oil demand growth remains sluggish. Although the total global oil demand is expected to rise by 1 million barrels a day in 2003, around 25 per cent of this increase could be attributed to the unusually cold weather during the first five months of the year, with a further 0.1 million bpd resulted from the prolonged outage of nuclear generation capacity in Japan.

Support for the current firmer oil prices was expected to erode and weaken, once the US crude oil inventories begin to rise towards the historical normal range. Data released mid of last week have already indicated a 4-million barrel increase in US crude oil stockpiles.

The rising US crude stockpiles in addition with the growing export shipment from Iraq would pose difficult choices to the Opec and would test its tenacity as an organization, many believe. Until now the organization has played its cards well and if it continues doing so, indications are that it would ride the emerging challenge later in the year as well.