Fundamentals played their part too. Fears of a prolonged Iraqi outage – and possible collateral damage to the oil industries of Kuwait and even Saudi Arabia – coincided with an unusually cold northern hemisphere winter, historically low US crude stocks and a strike that devastated Venezuelan production. No matter how often OPEC ministers repeated the mantra that the market was well supplied and that war shortages could be absorbed, traders refused to listen and prices remained stubbornly above $30.

When the storm clouds of war finally broke on 20 March, OPEC was as good as its word. The outbreak of hostilities was greeted with a suspension of quotas, and throughout the month members pumped an average of 26.5 million barrels a day (b/d), considerably higher than their official ceiling of 24.5 million b/d. Saudi Arabia’s monthly average reached 9.5 million b/d – a 21-year high. In the event, not even the initial price spike materialised and by 7 April the price of a barrel of Brent crude had fallen to a four-month low of $23.4.

Indeed, in the context of keeping prices within OPEC’s $22-28 target band, the organisation rose to the challenge almost too well, even winning rare praise from the International Energy Agency (IEA). ‘There is little doubt that OPEC has done much to calm an otherwise jittery market,’ says the agency’s March report. ‘Clearly producers have been pre-positioning crude in key consuming regions to mitigate the potential impact of a prolonged supply disruption, thereby assuming the financial risk and burden of transforming long-haul into short-haul supply.’

OPEC ministers have been voicing their oversupply fears for months. ‘There is no shortage of oil,’ OPEC president and Qatari Energy & Industry Minister Abdulla bin Hamad al-Attiya said in January. ‘We face a large surplus in the oil market.’ Two months later, as he watched prices slide, the warning was repeated more urgently. ‘The market is full of oil – it is facing a glut,’ he said in early April. An emergency meeting was convened for 24 April. ‘OPEC did nothing wrong,’ says Sarah Emerson, managing director of the US’ Energy Security Analysis. ‘Venezuela was out, there were the Iraq worries and Nigeria was experiencing problems. But now all these are coming back on stream and a production cut is needed.’ Algerian Energy Minister Chakib Khelil warned on 10 April that prices could fall below $20 if producers did not rein in output levels in line with their official quotas.

As the fog of war clears, OPEC is left looking at a series of problems. The market is entering the weak second quarter, when demand typically falls by some 2 million b/d. The situation is exacerbated this year by a sluggish global economic recovery and a downturn in air travel, brought on by a combination of war and the SARS virus sweeping Asia. A considerable amount of oil is already on the water, hence the disparity between record production and continued low stocks in the US, Europe and Japan. The IEA’s March report talked of a possible ‘wall of crude’ set to hit the market when call for it is weakest.

Yet Iraq still throws up the biggest questions. Theories abound as to when, and at what level, Iraqi exports will resume. When oil installations were first secured without the systematic destruction feared, a three-month timeframe was suggested for restoring previous production levels. ‘I see exports resuming much faster than most people are forecasting,’ says Mehdi Varzi of Dresdner Kleinwort Wasserstein. ‘There are some 8 million barrels in storage in the Ceyhan export terminal, the Kirkuk facilities appear undamaged and the fires are out in the south.’

Nevertheless, the market should be able to absorb Iraq’s increases in the short term. ‘Demand is reasonably strong right now, as US and European refiners are doing their buying, so I don’t expect to see any price collapse,’ says Emerson. In addition, the bulk of any restored Iraqi output is unlikely to reach the market before the third quarter, when demand for gasoline is boosted by Americans taking to their cars for the summer driving season. Consequently, analysts forecast an average second-quarter Brent price in the region of $26.

The medium to long-term outlook for OPEC is more troubling. Iraq has often been a spanner in the works of the group’s efforts to maintain price stability. The removal of Saddam Hussein and the prospect of international investment in Iraq’s dilapidated oil industry pose a threat of a new magnitude. Iraq is not a marginal oil player. Proven reserves are conservatively estimated at 112 billion barrels, second only to Saudi Arabia’s 262 billion. However, exploration activity stalled with sanctions and the Energy Intelligence Group puts probable reserves at 214 billion barrels. And, like Saudi Arabia and Kuwait, Iraq benefits from rock-bottom production costs.

The speed with which Iraq can return to production levels approaching those before the 1990-91 Gulf war is hotly debated. US Vice-President Dick Cheney – who is also a former director of energy services firm Halliburton – on 9 April predicted that production could be raised as high as 3 million b/d by the end of the year. His view was echoed by Iranian Oil Minister Bijan Namdar Zanganeh on 17 April: ‘If the restrictions on Iraq are lifted, Iraq’s oil production can easily go up to 3.5 million b/d in less than a year,’ he said. Most commentators regard this as extremely optimistic. ‘I see output climbing to somewhere between 2.2 million and 2.5 million b/d over the course of the year,’ says Varzi. Such levels can be more or less absorbed by stricter quota compliance within the OPEC 10 and stronger second-half demand. But the prospect of exploration and foreign investment pushing output much higher poses a fundamental challenge to OPEC members, which will be forced to cut their own output or watch prices fall. ‘Global demand is only rising marginally faster than increases in non-OPEC production,’ says Geoff Pyne of Sempra Energy Trading. ‘Iraq is going to be very, very challenging for the organisation.’

The assumption is that whatever post-war regime emerges Iraq will remain within OPEC. In these circumstances, it is expected to press for a quota in line with Iran’s. However, one school of thought argues that a new government will claim exemption from quotas on the grounds of the need to maximise revenues for reconstruction. ‘I doubt Iraq will accept any fetters on its production for years to come,’ says Varzi. ‘OPEC is going to need to have a fundamental quota debate. If they want to maintain price, and demand continues to climb slowly, OPEC members are just going to have to cede market share.’ Varzi argues that producers are already arming themselves for the quota battle, ramping up output as fast as possible to justify claims for a high ceiling. ‘While Saudi Arabia will have to shoulder the bulk of any cuts, Riyadh may insist on a pro-rata reduction.’

It is in Saudi Arabia that the development of its neighbour’s oil industry will be most closely watched. Some in the kingdom fear a new government closely linked to the US will be persuaded to flood the market with cheap oil. ‘The US bypassed the UN Security Council in going to war against Iraq,’ wrote Adnan Jaber, economics editor of Saudi Arabia’s Al-Watan newspaper, in early April. ‘It could just as well bypass OPEC in its quest for cheap Iraqi oil.’

Certainly, some in the US harbour desires to break Riyadh’s market power. ‘What the US needs is a second swing producer, and with US help Iraq could easily play that role. Isn’t it reasonable to make Iraq the answer to our desire for energy independence?’ wrote former US energy secretary John Herrington in the LA Times on 23 March.

Any threat to Saudi dominance will take some time to emerge. The most optimistic estimates suggest that Iraqi production could be lifted to 5 million-6 million b/d in five years, compared with Saudi Arabia’s current capacity of 10.5 million b/d. This optimism appears well founded. A swift injection of foreign investment has been recommended by the group of Iraqi oil experts established by Washington to map the future direction of Iraq’s oil industry. Production at this level would affect Saudi Arabia’s position as OPEC’s lone swing producer.

‘An era that began with the collapse of the Soviet Union and the imposition of sanctions on Iraq in the early 1990s is coming to an end,’ says Emerson. The emasculation of Riyadh’s two main competitors elevated the kingdom to an unprecedented position of market power. Output rose from 5 million b/d to 8 million b/d. ‘The question arises as to whether Saudi Arabia can transform itself from pre-eminent producer to effective leader,’ Emerson asks. ‘Along the way, how much market share should the Saudis be willing to sacrifice to bulwark their leadership?’

These and other questions surrounding Iraq appear destined to preoccupy OPEC and the oil markets for years after Baghdad has disappeared from television screens. For OPEC members, Iraq will pose much more of a threat after Saddam Hussein’s removal than it did while he was in power.