OIL markets are in a delicate condition as the summer holiday season moves into top gear. This time last year crude oil and products were in short supply, demand was rampant and inventories were depressed after a cold winter. Oil prices were starting to scale the dizzy heights, rising to around $20 a barrel before surging towards $25 in December.

This year, all the signs are pointing towards a radically different second half. Prices are not expected to plunge but they are weakening. And, Iraqi oil exports - currently suspended - are at the centre of every calculation about what might happen to prices in the coming weeks.

Any thoughts that OPEC might reassert its market influence were put out of mind by the late June ministerial meeting. So many members are now flouting their quotas that the whole notion of an OPEC production limit lacks credibility.

The existing quota of 25.03 barrels a day (b/d) was rolled over for another six months and members have pledged to return to their official allocations, according to OPEC Secretary-General Rilwanu Lukman. This would cut global supply by about 2 million b/d.

Even the normally reticent Ali Naimi, Saudi Arabia's Minister of Petroleum & Mineral Resources, was quoted as saying there was a '100 per cent commitment' to the cutbacks. The trouble is, no one believes it. Venezuela is producing at least 800,000 b/d above quota; output by tiny Qatar is about 50 per cent over quota and rising.

OPEC production, now near its highest for 18 years, is flowing into a market which is growing steadily but is also very adequately supplied. Through the spring, prices were propped up by supply delays, due to refinery turnarounds and North Sea shutdowns coinciding with strong demand in the US and a new record for Chinese imports set in April. Consumption is even rebounding in the former Soviet Union after years of erosion.

In June the Paris-based International Energy Agency (IEA) said that some tightness might continue, but 'for the latter half of 1997 and 1998, oil markets are expected to be well supplied.'

This is ominous for countries looking for another boost from oil income this year. Increasingly, the experience of 1996 is being viewed as an exception rather than a new dawn heralding an era of significantly higher oil prices. The average price of oil in the year to end-June was actually higher this year than in the same period of 1996. But, short of a regional crisis with global resonance, prices are expected to fall back in the second half. In the second half of 1996, they soared above $20 a barrel in August and stayed up there until the market eased last February.

One of the biggest differences is inventories. Stocks of crude and products have become dangerously depleted in recent years. Without significant inventory to dip into, markets became much more volatile. Stocks are now being rebuilt. After a relatively mild winter which limited the drawdown, stocks rose by an impressive 1.4 million b/d in May and continued to rise through June. Such is the strength of the recovery that commercial stocks now provide 11.4 days of forward cover. The stock build in the third quarter is expected to be particularly strong. If Iraqi crude becomes available again soon, the stock build will be even bigger.

Demand is also robust. The IEA jacked up its global forecast of second quarter oil demand by 400,000 b/d to 72.6 million b/d as both China and the US showed unexpected strength. The agency expects demand to average 73.8 million b/d over the full year, rising to 75.6 million b/d in 1998.

Meeting this demand poses no problem for now as supplies are growing all the time. During the third quarter, Iraq, Colombia and the North Sea are all expected to increase output. And, excess OPEC production shows no sign of abating, whatever the ministers may have promised in Vienna.

Iraq is the major uncertainty at present. As Baghdad negotiates with the UN about the humanitarian aid programme, it has suspended oil exports. The temporary absence of some 750,000 b/d of Iraqi oil is slowing the global stock build. Uncertainty about when Iraqi sales will resume is also keeping prices at elevated levels as traders ensure their short term commitments are covered. Not for the first time Iraq is exerting enormous influence over the oil market. All the evidence suggests that prices should be easing; instead they are showing some residual strength. The unanswered question is when they will fall back and by how much.