A political premium that has been factored into oil prices for most of 2002 has been at its highest in recent weeks, as speculation over US plans for regime change in Iraq reached fever pitch. However, as Washington went to the UN to seek agreement on the need for military action, Baghdad backed down, reducing the prospect of an imminent strike.

However, the threat remains real and has to some extent increased. With a more multilateral approach, US President George Bush has won over a larger group of potential allies in action. Saudi Arabia, the US' foremost regional ally, welcomed the administration's changing tune with the announcement that all UN members were obliged to uphold its resolutions.

Iraqi oil exports have lost much of the pivotal position they used to enjoy. Over the past year, export levels have more than halved, made unattractive by illegal surcharges and the retroactive pricing regime introduced by the UN to stop them. Now levels are rising again, following Iraq's cancellation of the surcharge on all oil exports. Exports recovered significantly in mid September, climbing from around 300,000 barrels a day (b/d) to more than 900,000 b/d over the first two weeks of the month. Total export capacity is more than 2 million b/d.

The improved prospects for Iraqi crude to hit the market have reduced some of the political pressure on OPEC. However, in the aftermath of the Osaka meeting, Saudi Petroleum & Mineral Resources Minister Ali Naimi paid heed to international concerns: 'security of supply, continuity of supply and stability of supply' would be guaranteed by OPEC, he said.

With production already running at about 2 million b/d above quota, there is a concern that the organisation's credibility is slipping along with its discipline. Political pressure is also being exerted by the US and European governments who are concerned that continued output curtailments will drive the oil price further up, stunting the nascent economic recovery.

Both are reasonable concerns, but must be set against the organisation's own assessment of market fundamentals. 'We are agree that OPEC has no reason to change production because we believe the market is oversupplied,' said Qatari Energy & Industry Minister Abdulla bin Hamad al-Attiya on 18 September. For the kingdom, the largest OPEC producer, some of the political heat has also been removed by its perceived acquiescence to action against Iraq, giving it more leeway to follow its own energy policy.