OPEC meets amid doubts over price control

Oil prices will remain high even after the resolution of the Iraq conflict, according to a report by KBC Asset Management.

The assessment comes on the eve of what is likely to be the last meeting of OPEC leaders before the weekend deadline imposed by the United States for a Iraqi disarmament.

With stockpiles low due to fears of war, a severe winter in parts of the US, a strike in Venezuela's oil industry and spare production capacity within the OPEC oil cartel limited, chief investment officer Mr Noel O'Halloran believes prices will remain around the $30 (€27) a barrel level for the foreseeable future. This is despite the fact that "OPEC's real supply/demand balance would suggest an oil price in the low $20s", he says.

Oil prices have come back slightly from the $40 high in recent days but still ended last week at $36.60 - about 70 per cent higher than a year ago. Irish oil imports have doubled in value to €1.4 billion since 1998, according to Mr O'Halloran.

Global oil inventories in the third-quarter of last year fell by 72 million barrels at a time when they would have been expected to rise by 30 million barrels, he notes.

"Rebuilding oil inventories, as well as releasing capacity constraints, is likely to mean that oil prices are likely to remain high well after the end of any Iraqi conflict [assuming such an event will be short]," he says. "This will be in contrast to what happened following the end of the Gulf War when the oil price fell sharply once it was over."

His comments come ahead of the meeting in Vienna of OPEC oil cartel energy ministers who are seeking a compromise that guarantees world oil supplies in the event of war, without appearing to underwrite military action against Iraq.

Although production quotas are expected to be in the focus, analysts said OPEC would have little room for manoeuvre, given that spare production capacity is relatively small.

OPEC raised its output quota from 21.7 million barrels per day to 23.0 million bpd in January, and again to 24.5 million bpd in February, in a bid to rein in prices. But the quota hikes had little impact, partly because actual output by the group's members already exceeded the quotas, analysts said.

Mr Lawrence Eagles, an analyst at brokerage GNI-Man Financial said the latest survey of OPEC production put output, including Iraq, at 27.21 million bpd, up 1.56 million bpd since January.

OPEC's stated aim is to keep oil prices within in a range of $22 to $28 per barrel. But the price of OPEC's basket has stayed well above the upper target of $28 dollars a barrel since mid-December 2002.

With a possible war threatening to cut off Iraq's output of 2-2.5 million bpd, attentions have turned to the ability of other producers to make up any shortfall. Kuwait could add to the current shortfall in the market by halting as much as 700,000 barrels a day of its production as it shuts down fields to protect them from potential Iraqi sabotage.

The US Department of Energy estimates that OPEC countries excluding Iraq and Venezuela hold between 2.1 and 2.5 million bpd of excess production capacity that could be brought online.