Market oversupplied by 2 million bpd: OPEC chief

Fitri Wulandari, Jakarta

The Organization of Petroleum Exporting Countries (OPEC) said on Sunday that the soaring of oil prices to historic peaks was not caused by a shortage because the market already had an ample supply.

"The world is oversupplied by 1.5 million barrels per day (bpd) to 2 million bpd; the figure fluctuates from time to time. But the problem is not based on the supply-demand balance," OPEC president Purnomo Yusgiantoro said.

He said non-fundamentals were the factors still dominating the recent rally in oil prices.

Oil prices breached fresh peaks of US$46 per barrel on Friday, fueled by fears over supply disruption following heightened tensions in Iraq and political turmoil in OPEC's third-largest producer, Venezuela, ahead of Sunday's referendum to determine the fate of incumbent president Hugo Chavez.

The financial crisis at Russia's oil producer giant Yukos has added to fears. Russia is the world's second-largest oil producer after Saudi Arabia but is not a member of OPEC.

While expressing concern at high oil prices, Purnomo said, OPEC had helped to cool the price by pumping an extra 2 million bpd of its quota, bringing its output to a total 30 million bpd.

Purnomo said the group might still have spare capacity of up to 2 million bpd but it still had to be verified.

"We are still checking with OPEC members to see if they still have spare capacity. We shall discuss it at September's meeting," Purnomo said.

OPEC is scheduled to meet in Vienna on Sept. 14 to discuss its quota policy.

Purnomo said, however, crude oil prices might ease to $30 per barrel next year as political turmoil in Venezuela and Iraq, as well as the financial crisis in Yukos, were expected to be resolved.

"There is a psychological premium in the market of $15 per barrel because of Yukos, Iraq and Venezuela. If the premium can be eliminated, oil prices will be down to $30," Purnomo said.

Purnomo said OPEC would meet non-OPEC nations and ask them to raise output to cool surging oil prices. High oil prices could further damage the world oil market.

The oil price hike has also sparked concern at home of a heavier burden on the state budget as the government will have to allocate a greater amount in funds for the fuel subsidy. The country still imports some of its fuel needs.

The government decided not to raise fuel prices to avoid social unrest during this election year. It maintains a subsidy for certain types of fuel, particularly those that are used by the transportation sector and low-income households.

The current state budget assumes an average oil price of $22 per barrel. However, if prices average $35 per barrel for the whole year, the subsidy is expected to rise to Rp 56.90 trillion, triple the initial budgeted amount of Rp 14.5 trillion.

This will bring additional deficit to the state budget of Rp 1.5 trillion to Rp 2 trillion. It means the government is unlikely to achieve its target deficit of 1.2 percent of gross domestic product, or Rp 24 trillion.

Purnomo, however, said that additional deficit up to Rp 2 trillion was manageable.

"We'll start belt-tightening measures, so the deficit is manageable. Besides, there is expenditure that can be delayed to compensate (for the high spending in fuel subsidy)," he said.