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Monday, 16 September, 2002, 11:19 GMT 12:19 UK
Oil supply decision looms
Meeting of Opec ministers
Opec ministers will discuss a rise in production levels
The oil producers cartel Opec is set to decide this week whether to increase oil production levels in an effort to maintain supply and ease the escalating oil price.


This is probably the most important Opec meeting for quite some time

Mario Traviati, Merrill Lynch
The cost of oil is currently at its highest level for over 18 months, with US crude prices hitting $29.77 a barrel on Monday amid the on-going threat of a war with Iraq, which is a member of Opec.

Many analysts argue that more crude oil is needed to prepare for the rise in consumption as colder weather begins in the northern hemisphere.

But members of Opec - the Organisation of Petroleum Exporting Countries - are divided on whether the price hikes are the result of limited supply or simply the threat of an attack on Iraq.

Historic meeting

Opec will meet on 19 September in Osaka, Japan, to agree production levels for the coming three months.

If they decide to raise output, it will be the first such move in two years.

Analysts say if production is not raised, oil prices could be pushed to over $31 per barrel.

"This is probably the most important Opec meeting for quite some time," said Merrill Lynch analyst Mario Traviati.

"For almost the last two years, it's always been a question of 'How much are they going to cut?' For the first time, everyone's asking, 'How much are they going to increase?'," Mr Traviati added.

War premium

Opec members pumps around a third of the world's crude oil between them but some ministers are concerned that raising production levels will soften prices too severely.

The organisation's secretary-general Alvaro Silva argued on Monday that world supplies of crude were sufficient and that price-hikes were the result of fears over a US-led attack on Iraq.

Traders have estimated that the concern has created a "war premium" of between $4 to $6 per barrel.

The Middle East sits on about two thirds of the world's crude oil reserves, but military action in the region could hamper the flow of oil elsewhere.

The $45 a barrel threat

"The real question is what's going to happen in Iraq," Independent Strategy's Bob McKee told the BBC's World Business Report.

"If there's a quick military victory and oil supplies come under the control of the US, then prices could come quickly down.

"But if it's a long-term, messy and drawn-out war, then we could see prices rising considerably higher, even higher than $45 a barrel," he said.

US crude prices jumped almost $1 per barrel on Friday after Iraq rejected US demands to allow weapons inspectors back into the country.

Opec split

Opec output is currently at its lowest level for 10 years at 21.7m barrels per day.

But its members are divided on the issue of production levels with Kuwait, Venezuela and Qatar all opposed to any increase, while Algeria is arguing for a rise.

Saudi Arabia, the leading oil producer, has yet to state its position.

Analysts have suggested that lifting levels by 500,000 barrels per day could send prices down to $28.50 per barrel, just over Opec's target range of $22-$28 per barrel.

 WATCH/LISTEN
 ON THIS STORY
Bob McKee, markets analyst
"We could see prices move a lot higher"
See also:

09 Sep 02 | Business
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