Oil markets tight, little room to cope with shortfall

VIENNA, Austria -- A surge in world oil output last month has left producer countries with too little spare capacity to fully offset a wartime halt in supplies from Iraq, the International Energy Agency warned Wednesday.

Output increased 2.5 percent worldwide in February and oil inventories tightened in major importing nations, the agency said. Fears of a U.S.-led attack on Iraq propelled prices to their highest levels since the 1991 Gulf War.

International oil markets are "running on empty" as war clouds gather again in the Persian Gulf, the agency said in its monthly oil market report.

"A further supply disruption would tax a system operating at close to capacity," the report said.

The only reliable cushion for consumers may be the 4 billion barrels in strategic stocks of crude that IEA members have amassed for use in an emergency, it added.

On Tuesday, the Organization of Petroleum Exporting Countries decided to leave its oil production quotas unchanged at 24.5 million barrels a day. OPEC, which pumps about a third of the world's crude, made clear that it would boost its output to try to cover any shortfall arising from a war.

The IEA is the energy watchdog of the Organization for Economic Cooperation and Development, a group of the world's wealthiest oil-importing countries.

Reducing demand

While highlighting many causes for concern in oil markets, the IEA expects that the end of winter -- the peak season for heating oil sales -- will reduce demand for crude by about 1.6 million barrels a day. Such a decrease would in itself offset a loss of Iraq's current exports under the U.N. oil-for-food program, the report said.

The IEA acknowledged efforts by OPEC and independent producers to put additional crude on the market. World production rose in February by 1.96 million barrels a day to 79.41 million barrels, and OPEC contributed more than three-fourths of the increase, the agency said.

OPEC member Venezuela boosted its daily production by 850,000 barrels as its oil industry continued to recover from a crippling strike. Saudi Arabia's output grew by 330,000 barrels a day, and of OPEC's 11 members, only Iraq and Indonesia failed to pump at higher levels last month, the report said.

"If the IEA's numbers for OPEC production in February are correct, there's a lot of oil on the water that should be hitting inventories in a few weeks. That's the good news for consumers," said Adam Sieminski, an oil price strategist at Deutsche Bank in London.

Sieminski agreed that OPEC's limited amount of spare capacity could be a problem if markets suffer a serious supply disruption. Most producers are pumping all they can, and only Saudi Arabia -- with the world's biggest oil reserves -- has significant room to pump more.

OPEC claims to have 2 million to 4 million barrels in additional production capacity. The IEA argued that OPEC's "effective spare capacity" -- the additional crude it could produce on short notice -- was much smaller.

The agency said OPEC's effective spare capacity fell last month to 1.72 million barrels a day from 2.37 million barrels in January, as the cartel produced more oil to make up for the outage from Venezuela. With OPEC increasing production to cash in on current high prices, this extra capacity has probably diminished in March to fewer than 1 million barrels a day, the report said.

It warned that OPEC would therefore be unable to quickly cover a war-induced shortfall from Iraq, which produced 2.49 million barrels a day in February. If U.S.-led forces attacked Iraq during the second half of March, the IEA suggested that it would be May before OPEC could offset the shortfall.

U.S. spot prices for light, sweet crude climbed by an average of 8.4 percent in February to $35.75 a barrel, while futures prices peaked at $39.99 on Feb. 27. The average spot price of North Sea Brent, the European benchmark crude, rose by 4.3 percent to $32.67, the report said.

Projected oil demand for 2003 is 78.01 million barrels a day. A cold winter and greater industrial use of crude in Asia and North America kept demand strong in January, and seasonal demand should fall by 1.6 million barrels a day in the spring, the IEA said.

"I think that's a vast underestimate," said Kevin Norrish, head of commodities research at Barclays Capital. He argued that high crude prices are discouraging consumption and slowing economic growth.

"The risk has got to be that we'll see a very, very steep fall in demand in the second quarter," Norrish said, echoing OPEC's fears of a possible drop in prices if Iraqi exports resume quickly after a war.