Image: Iraq oil fire
A fireman washes his face for relief from the heat of a raging fire at a crude oil pipeline near Bayji, Iraq last Thursday. Post-war looting has delayed Iraq's attempts to get crude capacity back up to pre-war levels.
By John W. Schoen Senior Producer
msnbc.com

OPEC members meeting in Vienna this week are once again expected to leave production quotas unchanged as supply and demand for oil seem to be well enough in line to keep prices stable within the cartel’s $22-$28 a barrel target price range. But there are several cross currents at work in world energy markets that could quickly upset the balance

For one thing, inventories of oil — though they’ve been slowly rebuilding — are at historic lows. In the U.S. the total petroleum stockpile stands at 276 million barrels, enough to supply the nation for two weeks. (That inventory figure does not include the 600-million barrel U.S. Strategic Petroleum Reserve.) That’s 6 percent below normal and the lowest level in a decade for this time of year. Without an adequate supply cushion, oil prices are more sensitive to production interruptions anywhere in the world.

Why are reserves so low? The loss of Iraqi production gets part of the blame, but a strike by Venezuelan workers in December also cut supplies. In fact, petroleum levels have been running well below normal levels for the past year.

But the biggest wild card remains Iraq, which is sitting on the world’s second-largest pool of proven oil reserves. Output from Iraq’s creaky oil industry reached 2.5 million barrels a day in February before production was halted following the fall of Baghdad in March, when production slowed to a dribble.

Since then, Iraqi oil officials and American advisors have been trying to rebuild capacity, which was further damaged by post-war looting. But so far, Iraq is producing only 1.5 million barrels a day — about 900,000 of which is available for export.

“It’s going to take between three months and six months before we see the Iraqi oil output get to a point to the same level as pre-war,” said Fadel Gheit, an oil analyst at Oppenheimer & Co. “And that will give Iraq about 2 million barrels of export. If we have two million barrels of export, you’ll see oil prices in the low 20s.”

Other analysts are not as optimistic, saying it would be 2005 before Iraqi production reaches pre-war levels. And Gheit noted that a critical, one-million-barrel-a-day pipeline from the oil-rich Kirkuk fields in northern Iraq remains vulnerable to sabotage from a guerilla attack.

“The security for the pipeline is very lacking,” he said. “The situation has to change.”

As a result, OPEC is carefully watching the rebuilding of Iraq oil facilities and has invited an Iraqi delegation to Wednesday’s meeting — the first time Iraq has attended an OPEC meeting since U.S.-led forces ousted Iraqi President Saddam Hussein. (Iraq hasn’t participated in OPEC quota agreements since the United Nations imposed sanctions in 1990 to punish Baghdad for invading Kuwait.)

Though Iraq will have a seat at the table, some OPEC members say they will continue to give the delegation the cold shoulder until a new government is established and recognized by the U.N. As he arrived in Vienna Monday, Venezuela’s energy minister, Rafael Ramirez, said Iraq’s role should be “informal” — with no say in the cartel’s decisions.

“Our position is clear. Venezuela hopes to have Iraq included within OPEC, but the internal situation of Iraq should be resolved, and there should be recognition by the U.N.,” Ramirez said.

Asked whether his delegation would quit the meeting if Iraq is allowed to attend in an official capacity, he said: “We will have to discuss that. But I think there will be a consensus, as usual.”

Then there’s the always-tricky matter of forecasting how much oil the world will need in the months ahead. OPEC is currently forecasting world demand of 79 million barrels a day — up just over 1 million barrels a day. That’s in line with private forecasts by energy analysts like Tyler Dann at Banc of American Securities.

But those demand forecasts rely heavily on two perennial wild cards: world economic growth and the weather. A strong economic recovery — coupled with a really cold winter — could renew upward pressure on oil prices. A mild winter and weak economic growth, on the other hand, would help keep oil prices low unless OPEC further restricts supplies.

So far, the production shortfall in Iraq has allowed the remaining “OPEC 10” to maintain their current production — without prices falling. But that’s also allowed them to bust their own quotas to help keep oil flowing to pay the bills of Middle East economies increasing dependent on oil revenues.

Quota “compliance levels” — a measure of how many countries are cheating and producing more than they agreed to — is also fairly stable, though relatively low at around 40 percent, according to estimates from UBS oil analyst Paul Ting.

That means, if Iraqi production comes on line, offsetting cuts by the remaining OPEC members could bring big oil revenue shortfalls. With their own economies sluggish, those cuts could prove too painful to make.

Reuters contributed to this story.

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