CGES: High oil price means no room for Iraq

Recent high oil prices have killed any hope that Organization of Petroleum Exporting Countries members will trim production to make room for limited sales of Iraqi oil. That's the view of London's Centre for Global Energy Studies (CGES), which said distribution of supplies to Iraqi Kurds is the only stumbling block in negotiations between Iraq and the United Nations. Iraqi government and U.N. officials have been haggling since February over a plan to allow sale of $2 billion worth of

April 29, 1996

3 min read

Recent high oil prices have killed any hope that Organization of Petroleum Exporting Countries members will trim production to make room for limited sales of Iraqi oil.

That's the view of London's Centre for Global Energy Studies (CGES), which said distribution of supplies to Iraqi Kurds is the only stumbling block in negotiations between Iraq and the United Nations.

Iraqi government and U.N. officials have been haggling since February over a plan to allow sale of $2 billion worth of Iraqi oil to buy food and medical supplies for Iraqi civilians.

"The prospective deal continues to receive favorable publicity within Iraq," CGES said. "The Iraqi government has recently released some of its strategic stocks in a bid to keep food prices down and expectations high.

"Although the U.S. is surprised by progress of the negotiations, it will not scupper the deal, for it still offers the best means of 'containing' Iraq in the future."

Market conditions

CGES data show the West Texas intermediate nearby futures contract has been trading at more than $25/bbl during April, while the OPEC basket of crude oils exceeded $21/bbl.

"Had the weather been normal and oil production from new fields in the North Sea and Australia performed according to expectations, it would have been a very different story," CGES said.

"CGES estimates that cold weather and delays to non-OPEC output have resulted in a net increase of 600,000 b/d in the call for OPEC crude over the last 6 months."

Resulting high oil prices have removed any possibility OPEC will accommodate Iraq's limited oil sales.

"Venezuela has no intention of observing its quota," CGES said, "seeing no reason why it should restrict its production with the market apparently clamoring for more oil.

"Saudi Arabia and Kuwait are unlikely to cut their output when others are blatantly exceeding their quotas."

CGES reckons that oil stocks are now so low that, even if limited Iraqi oil sales take place, prices are unlikely to collapse to a level that would force OPEC to take drastic remedial action.

"The current strength in oil prices has made OPEC's member states complacent about the possible return of Iraqi oil exports. This could prove to be a mistake, although it is unlikely to become apparent until late in the year."

OECD and prices

CGES said there is evidence of stronger economic growth in Organisation for Economic Cooperation & Development (OECD) countries, which could lead to a 2% increase in OECD's average oil demand for the year to 41 million b/d.

This, CGES said, would allow OPEC to maintain production at about 25.9 million b/d, yielding average prices for OPEC basket crudes of $18.40/bbl in the first quarter, $19.10/ bbl in the second, $17.40/bbl in the third, and $16.50/bbl in the fourth.

If growth in OECD demand does not continue, CGES said, OPEC basket crudes will average $18.40 in the first quarter, $18.80 in the second, $16.10/ bbl in the third, and $14.30/bbl in the fourth quarter.

And if Iraqi oil returns to the market in June and OPEC fails to make room for it, even with growing OECD oil demand the price for OPEC basket crudes would fall to $16.10/bbl in the third quarter and $13.10/bbl in the fourth, CGES said.