Slow Venezuelan recovery fails to allay Iraq concerns

25 February 2003
Oil prices climbed to 26-month highs in early February as struggling supply increases failed to offset the fears of a new conflict in the Gulf. Reports that OPEC was not on course to meet its February quota targets and the release of a new tape by Osama bin Laden pushed the price of March Brent crude futures to $35.40 a barrel on 11 February, the highest settlement level since November 2000.

Venezuelan oil production has now climbed to around 1.5 million barrels a day (b/d), according to striking workers at state oil company Petroleos de Venezuela (PDV). When the strike began in early December, production fell from nearly 3 million b/d to only 200,000 b/d. It has been slowly recovering since. However, the recovery is unlikely to gain much pace. 'They have destroyed the business unit, they have destroyed the brain of the corporation, they have fired the people that managed planning, the developers of new businesses, the people managing the market operations,' said former PDV president Luis Giusti about the government on 11 February. 'Perhaps you can get to 2 million b/d in the next year.'

Indications are that other OPEC countries are failing to make up for the lost Venezuelan production. In January, OPEC decided to increase February production to 24.5 million b/d from 23 million b/d. However, with Venezuela still 1.4 million b/d below its quota, the others need to fill in the gaps. A Reuters survey of analysts' production estimates found January crude output from OPEC 10 countries only reached 23.2 million b/d.

The International Energy Agency (IEA) in early February voiced concerns over the level of OPEC's spare capacity and its ability to supply the market in the event of corresponding Venezuelan and Iraqi oil outages. The IEA also pointed to the increased demand for oil as a result of an unexpectedly cold winter in parts of the northern hemisphere.

Rising non-OPEC production is set to grow still further after the 10 February announcement by the UK's BP that it is to set up a $6,750 million company in Russia with two local companies. The business will have reserves of 5,200 million barrels in Siberia and Sakhalin, and will take over existing crude production of 1.2 million b/d.

If there is a war in Iraq, Western countries are expected to start releasing their strategic petroleum reserves, especially as commercial reserves are now at comparatively low levels. There have been some calls for the use of the strategic reserve to combat high energy prices as the US struggles with slow economic growth. However, many in the industry believe the reserves should be used solely in the event of a supply disruption.

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