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.