OPEC Plans Boost in Output
Amid Fear of War, Shortages
By BHUSHAN BAHREE, ALEXEI BARRIONUEVO and THADDEUS HERRICK
Staff Reporters of THE WALL STREET JOURNAL
With war in oil-rich Iraq looming, Saudi Arabia and several other OPEC members are backing a plan to increase oil output around the world by as much as two million barrels a day, opening the spigot much wider than expected.
The move comes as a strike in Venezuela has crippled oil production and sent prices higher -- and as the U.S. and other countries have been quietly trying to stockpile oil in advance of potential war, with limited success.
The prospect of a war in Iraq has sparked fears of serious oil shortages. Venezuela's strike alone has subtracted two million barrels a day from world markets. Iraq is producing more than two million barrels a day itself and exports much of it under United Nations supervision. The U.S. Energy Information Administration predicted last week that crude-oil inventories for the end of December would be at their lowest level since 1975.
OPEC officials say they could not make up for the simultaneous loss of oil production from both Venezuela and Iraq. The group is now taking the unusual step of calling on non-OPEC exporters such as Russia, Norway and Mexico to produce extra barrels. "There is a realization that a shortage might take place," said a senior OPEC official. "We don't want that."
The move suggests that OPEC is eager to avoid potentially huge price increases. As recently as this weekend, OPEC officials including the group's president, Abdullah bin Hamad Al Attiyah, had led the market to expect an increase of only one million barrels a day, or half the current plan.
OPEC officials declined to say whether their move to produce more oil is related to the prospect of war coming on top of the Venezuelan strike. But their timing suggests that the group is serious about getting more oil to markets in the next 30 days to 40 days. That also is viewed as the Bush administration's rough time-frame for a possible attack on Iraq. United Nations inspectors are due to deliver their report on Iraq's weapons programs on Jan. 27.
Elsewhere, attempts to prepare for a war in Iraq are quietly under way. Governments have put an estimated two million to three million barrels a day -- around the equivalent of Venezuela's prestrike production -- into off-the-books reserves during the last three months, said Fadel Gheit, an analyst at Fahnestock & Co. He said in addition to the U.S., Japan and the United Kingdom, among others, have also been hoarding so-called missing barrels to guard against possible supply disruptions. Asian countries in particular, he said, want to avoid a repeat of the Gulf War when refining profit margins and prices for refined products skyrocketed because of the incessant bombing of Iraq, severely tightening their jet-fuel supplies.
The hoarded oil is believed to be stored on tankers on the water or in storage units in remote locations, such as deserts. "But we don't know for sure where it is," Mr. Gheit said.
In the U.S., several refiners have asked the U.S. to release oil from its Strategic Petroleum Reserve as soon as possible. The Bush administration has so far declined, saying a crisis level to trigger a release has not been reached. Energy Secretary Spencer Abraham, however, agreed late last week to let companies that had owed crude to the reserve for delivery in February to defer those deliveries.
Larry Goldstein, president of the Petroleum Industry Research Foundation, said some companies are "begging" OPEC countries for supplies, while some Middle East producers have already agreed to speed up deliveries ahead of an impending war.
Industry analysts said Monday Venezuelan state-owned oil company Petroleos de Venezuela SA is increasing its exports and its daily crude production. But the figures are still well below prestrike levels.
Ready Supply
A boost in production in the Middle East wouldn't affect the Venezuelan shortfall in the next few weeks. While Venezuelan shipments take a week or less to land in the U.S., supplies from the Middle East take five weeks or more, leaving the need for a faster stopgap. "The only short-haul supplier today is the U.S. government Strategic Petroleum Reserve," Mr. Goldstein said. "If we want to prevent higher near-term prices, the U.S. government has to be prepared to lend that oil."
Neither refiners nor major oil companies are holding significant stocks because it is too expensive. Refiners have been steadily trimming their inventory levels the past few years because they view stored oil as supplies that aren't producing money and weigh down their balance sheets. As of Dec. 27, weekly data from both the Energy Information Administration and the American Petroleum Institute showed that U.S. crude-oil stocks fell more than nine million barrels from the previous week, and were 11% below year-earlier levels.
Reflecting supply concerns, oil prices have stayed above $30 a barrel in recent weeks.
The decline in inventories seems to have commanded the attention of OPEC's influential producers only as recently as this weekend. OPEC officials had first promised last week to increase supply by a modest 500,000 barrels, or slightly more, if prices remained high until mid-January and there were no signs of an early resumption of Venezuelan exports. OPEC currently is producing some 25 million barrels a day, accounting for about a third of world supply.
But an agreement on increasing production by between 1.5 million and two million barrels a day could be announced within a week, the senior OPEC official said. Some key OPEC members, such as Iran, will need to be convinced because of the risk of glutting markets if Venezuela resumes exports while extra oil from the Middle East is already on tankers. But supporters of the increase expect no real opposition. "Most likely, the ministers won't even have to meet" to reach a consensus, the senior official said.
Rattling Markets
Earlier news that OPEC was considering an increase of even one million barrels a day rattled oil futures markets in London and New York Monday, where prices fell. North Sea benchmark Brent blend crude for February delivery closed at $30.44 a barrel on London's International Petroleum Exchange, down from $31.47 on Friday. U.S. light crude for February delivery settled at $32.10, down 98 cents, on the New York Mercantile Exchange.
Russian oil minister Igor Yusufov, who met with Saudi oil minister Al Naimi over the weekend and was due to meet with his Kuwaiti counterpart Monday, has promised to help alleviate the supply shortage, which he reckoned could be as much as 1.5 million barrels a day.
It is unclear how much of the target really will be pumped into world markets, because many OPEC members already are producing at their maximum sustainable capacity. Most of OPEC's unused production capacity of about 4.4 million barrels a day is in two countries: Saudi Arabia, which can add 2.5 million barrels, and United Arab Emirates, which can add 600,000 barrels.
Countries who can boost their production would have to agree to make up the share of those who cannot, such as Indonesia and Qatar, to meet the target.
Write to Bhushan Bahree at bhushan.bahree@wsj.com, Alexei Barrionuevo at alexei.barrionuevo@wsj.com and Thaddeus Herrick at thaddeus.herrick@wsj.com
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