RIYADH, July 28: With the situation in Iraq far from stable, some of Nigeria’s output shut after the earlier unrest in the country and questions still remaining over the ability of Venezuela to maintain production from ageing fields in the west of the country, analysts here feel that the oil cartel Opec could be encouraged to increase output at its end-July ministerial meeting.

Opec restrained its output early June, in the aftermath of the war in Iraq and the anticipation that supplies from Iraq could start sooner than later. That has not happened, and consequently the Opec may now feel itself in a stronger than anticipated position, the London based Centre for Global Energy Studies (CGES), founded by the former Saudi oil minister Sheikh Zaki Ahmad Yamani predicts in its current issue of the Monthly Oil Report.

Since May the oil market has tightened, pushing prices back to the top of Opec’s target range. The market oil prices were further firmed up by the global oil stocks situation, which outside the former Communist countries stood at just 5.4 billion barrels at the start of 2003, enough to meet just 79 days worth forward demand. This was well below the 84-85 days that the world’s oil industry would normally want to hold in store. By the end of June, the stock cover had risen to only 81.5 days’ worth of forward demand and with a third of this increase due to the normal seasonal downturn in consumption.

Atlantic Basin stocks also remain exceptionally low for the time being. At the end of June, total crude product stocks in the US and Europe were still 37 million barrels, below the lowest recorded for that month over the past five years. Although stocks rose by 500,000 bpd in the second quarter of the year, the starting point was so low that a bigger build-up was required to catch up after last winter’s very cold weather. In fact the stocks actually fell in June from the earlier levels. In the meantime, shipments from Iraq were to start in June but the schedule has slipped and slipped again. Initially this was put down to people trying to steal oil from the pipelines, but it is now generally accepted to be a part of a campaign aimed at disrupting attempts to restart the oil exports.

According to the CGES Monthly Oil Report, commercial oil inventories around the world need to be rebuilt at a rate of at least 1 million barrels a day over the next six months, if forward stock cover is to be restored to a more comfortable level by the beginning of the next year. The US alone needs to import oil at a record rate of 10 million barrels a day for the rest of the year to restore its on- land oil inventories to the middle of their historical range.

Another reason for the tight US oil market seems to be the current high natural gas prices. The higher prices have boosted demand for both residual fuel oil and middle distillates this summer as electricity generators had to switch from gas to oil.

At the same time crude supply has also tightened, adding to the upward pressure on oil prices. Non-Opec production also fell by 500,000 bpd last quarter, mainly because of the summer of-shore maintenance in the North Sea and the problems in Ecuador, while the Opec 10 (minus Iraq) also cut supply beginning last month by 650,000 bpd, in anticipation of the Iraqi return to the oil markets.

Thus the CGES believes the world needs around 0.7 million barrels per day more oil than was produced in June to meet the demands and rebuild stocks. It thus adds, were the Opec members to boost their aggregate output (including Iraq) to 27 million bpd for the next six months from the current 25.4 million bpd, global stocks would be restored to more stable 83 days’ worth of forward demand by the start of 2004, with oil prices close to the middle of the Opec’s band.

It seems that whatever happens in Iraq over the next six- months would determine the course of the world oil markets. The path of oil prices would thus depend heavily on how much progress is made in restoring oil exports from Iraq, and how other Opec members, especially its kingpin, Saudi Arabia, responds.