OPEC may need to cough up more oil this year

OPEC may need to cough up more oil this year

LONDON (Reuters): Confident oil cartel OPEC may have its
finger on the pulse of world crude markets but already producers
are coming under pressure to change policy again and lift
supplies later this year.

Market observers see trouble ahead in the form of a price
spike unless OPEC unleashes extra barrels in the third quarter to
fill crude stocks in time for the peak demand winter season.

Calculations for OPEC will be tricky because it has to
consider everything from demand for oil in the ailing U.S.
economy to Iraq's Saddam Hussein, whose unpredictable oil export
patterns can spoil the party for fellow cartel members.

The Organization of the Petroleum Exporting Countries is
coasting after agreeing to trim crude output by one million
barrels per day (bpd) from April 1 to strengthen prices.

Nevertheless, analysts say, it cannot afford to sit idle
despite its unprecedented success in tightly managing the market
in recent months with a series of output adjustments.

"They should make a modest increase in the third quarter of
one to 1.5 million barrels per day," said Geoff Pyne, an energy
consultant for Standard Bank.

"We still think OPEC needs to raise production in the second
half of the year unless there is a major economic recession,"
said Mike Barry of London's Energy Market Consultants.

Pyne, like others, warns of grave consequences in the fourth
quarter unless OPEC steps in with fresh supplies in June.

"It will be the ingredients for an extremely tight market. If
there is no pre-winter stock build we could be moving into the
fourth quarter with an attempted draw on stocks and there will
not be enough there," he said.

That kind of talk may make sense to oil consumers, traders,
analysts and even OPEC itself.

But increasing output will not be easy because OPEC is
sticking to one strategy -- keeping oil at $25 a barrel for its
crude.

The price-driven producers group is unlikely to open up its
taps for the sake of supply and demand if that means straying
from its target, even temporarily, analysts said.

These days, OPEC is driving a hard bargain, ignoring calls for
more crude from the United States, the world's biggest consumer,
which used heavy-handed diplomacy to extract more barrels from
the cartel before.

But OPEC's bold strategy could backfire by triggering a price
spike in the fourth quarter of 2001 that would drive crude above
its $22-$28 target for a basket of reference crudes.

"OPEC's attempts to micro-manage the oil market and keep
prices around $25 are likely to cause prices to spike sharply
later in the year," said the Centre for Global Energy Studies.

Producers are currently focused on the slowing U.S. economy,
hanging on every word from U.S. Federal Reserve Chairman Alan
Greenspan, hoping he forecasts happier times that would boost
demand for oil.

But the course of the U.S. economy will be hard to predict,
leaving producers in limbo for the time being.

OPEC has tackled oil price swings with extraordinary meetings
and lightning decisions to adjust supplies, a hands-on approach
that has restored its credibility after years of bickering over
quotas.

But some analysts warn OPEC's day-by-day strategy will be
risky, especially in the third quarter when the market craves
inventory stability ahead of winter.

"If they are going to keep the market short of stocks that
means supply and demand is balanced on a knife edge. There is no
buffer," said Standard Bank's Pyne.

Even if prices stay healthy and supply and demand is balanced,
there is one powerful force to be reckoned with that has brought
OPEC down in the past -- temptation.

The supply restraints have restored spare output capacity.
That means certain producers notorious for cheating on their
output quotas can play that game again.

"Investors are watching OPEC compliance. This is test time.
Now that there is spare capacity, how close can it hold
together?," asked Jonathan Wright, an oil and gas analyst at
Merrill Lynch.