Surging oil prices limit OPEC options: Analysts

Agence France-Presse, Paris

Resurgent tension drove oil prices higher last week and pressured OPEC to keep markets supplied as the cartel looked ahead to its meeting in Ispahan, Iran on March 16.

The Organization of Petroleum Exporting Countries was facing the end of winter in the northern hemisphere and many expected a production cut to offset a drop in demand for heating fuel that would otherwise push prices lower.

But a late-season cold wave in North America and northern Europe has driven oil prices up to record highs, and OPEC could find it hard to cut output just now.

At its last meeting in January, the cartel had dropped broad hints that the next gathering would see a production decrease.

"OPEC won't do anything (in Ispahan) because it can't to anything," forecast Frederic Lasserre, an analyst at Societe Generale.

"Lowering its output quota would be a provocation, raising it would be inappropriate and imprudent."

The analyst said OPEC had "very little room to maneuver, aside from reassuring everyone about the situation in the market."

"OPEC is not concerned by the cold wave because it can't technically resolve something that will be over three weeks from now."

It takes two months for a production increase to reach the markets owing to transportation and refining delays.

Although many expected the market to cool down following record prices last year, late-winter weather kept things hot this week.

Global demand has remained strong, contrary to International Energy Agency forecasts, owing also to continued Chinese economic growth, and prices shot back up to levels seen in October, reaching the US$55 level in New York last Thursday.

According to Rene Defossez of the Ixis Corporate and Investment Bank, OPEC is still worried prices will fall once warmer weather arrives.

A production increase would thus appear to be out of the question despite soaring prices.

OPEC "is producing enough", Venezuelan president Hugo Chavez said last Friday.

"OPEC has nothing to do with the crude oil price increase. It's how the market is structured."

Iran also estimated earlier that oil prices were "appropriate" and said maintaining output quotas unchanged at the Ispahan meeting was an option.

Last week, Saudi oil minister Ali al-Nuaimi -- sometimes called "OPEC's Alan Greenspan" -- suggested prices could remain at such levels throughout the year.

"Where the price is today, between $40 and $50 will probably be with us throughout 2005," al-Nuaimi said in an interview with the CNBC television network.

On Thursday, acting OPEC secretary general Adnan Shehab-Eldin said: "I cannot rule out oil prices rising to $80 a barrel within the next two years."

Some analysts felt global demand for oil continued to be overlooked.

Bruce Evers at Investec said: "Everyone loves to point to strong consumption in China and India, but demand is also extremely robust in northern Europe, Brazil and North America."

"I think everybody still underestimates global demand."