Oil seen staying high even on more supply

By Andrew Mitchell

LONDON (Reuters): Oil producers may be about to increase output but it looks like being too little, too late to make much of a dent in sky-high prices any time soon.

Global stocks of spare oil are now so thin that cartel Organization of Petroleum Exporting Countries (OPEC) need have little fear of damaging prices by lifting supply -- even though demand is about to hit a post-winter trough, oil traders and analysts said on Monday.

In such a tight market, even an output increase at the top of current expectations will fail to knock prices far from current nine-year peaks at US$30 a barrel, they said.

"OPEC tends to think that the second quarter fall in demand hits prices in the second quarter. It doesn't -- it takes effect now. The market has already taken it into account and look where prices are," said an oil trader with a Wall Street bank.

"It's too late," said consultant Philip Verleger of PKV Associates of the plans to ease a growing supply shortage. "The real problem now is that the situation could get even worse."

Producers' demand worries are likely to mean caution as they decide when and how to relax some five million barrels per day (bpd) of supply curbs which have trebled prices from sub-$10 lows in less than a year.

OPEC members Saudi Arabia and Venezuela -- preparing for policy talks in London on Thursday with fellow producer power Mexico -- have each said post-winter demand drop will feature in their calculations.

Yet traders estimate that the market already has factored in an April supply increase of at least 1.2 million barrels per day (bpd) -- a projection that did not stop U.S. crude prices last week returning to post-Gulf War highs.

Over the last decade benchmark Brent has only once fallen more than $1.50 a barrel between 1 April and 30 June, and in four of the last nine years, prices actually rose.

"The fall in second quarter demand is much less of a factor than it used to be because oil's role as a heating fuel has diminished," said Nigel Saperia of oil trading company Glencore.

Fears of a price slide mean that while some producers are floating a 1.7 million bpd April supply increase, price hawks like Iran and Kuwait have said an output rise will only be safe in the fourth quarter.

Oil traders argue that even an output rise towards the top of that range will not stop prices tearing along near current levels above $25 a barrel -- a level the United States believes is dangerously high.

"Anything lower than a 1.5 million barrels per day (bpd) supply increase will be pretty resilient for the market," said Glencore's Saperia.

"A rise between one million and 1.5 million bpd will be very bullish. There will be supply problems in the summer," added the Wall Street trader.

Even a quick-fire early April output increase after OPEC's ministerial meeting on March 27 would make little impression on physical deliveries until the middle of May.

"It takes time to bring oil from the Middle East to the U.S. It could be as long as six weeks before incremental supplies could get here," said Verleger

Oil supplies have been stretched so thin trying to keep up with winter demand that oil refiners will have to keep running hard to make the minimum necessary preparation for high summer gasoline needs.

Traders also point out that OPEC already is leaking more than a million barrels daily than it should be under last year's agreement to remove 4.316 million bpd.

In an agreement to add about 1-1.2 million bpd from April, the market might actually get only 500,000 bpd of fresh supply, said broker Nauman Barakat of ABN Amro.

"It will not do a great deal more than legitimize current cheating," said Glencore's Saperia.

Consumers are also threatened by a sudden drought in Iraqi supply. Baghdad says it might slash crude exports in March should the U.S. continue to block spare parts contracts for its ailing oil sector.