LONDON, April 28 - Oil prices fell to their lowest level this year on Monday as dealers voted bearishly on OPEC's convoluted output deal last week which is set to deliver less than a third of the promised two million barrel-per-day cut. Benchmark Brent crude oil dropped 41 cents to $23.68 a barrel, having touched a low of $23.40 for the first time since November 2002. U.S. oil prices, declining for the fifth day running, was down 38 cents at $25.88 a barrel.
"The market has now had time to assess a very confusing OPEC decision last week and decided that it can only be bearish," said Barclays Capital oil market analyst Kevin Norrish. "The high levels of production will continue through May." The Organisation of the Petroleum Exporting Countries confounded markets last week by raising official supply quotas while claiming a huge two million barrel per day (bpd) cut in actual production. Although the 10 members hiked production ahead of the war in order to prevent a repeat of the price spike seen during the 1990-1991 Gulf Crisis, analysts said it had reached nowhere near the basis figure of 27.4 million bpd used to measure the cut. Iranian Oil Minister Bijan Zanganah conceded as much on Friday, saying production from the 10 members excluding Iraq would be arond 26 million in April and May. This means the new ceiling from June 1 of 25.4 million bpd would only remove around 600,000 bpd from the market under the unlikely scenario of full compliance -- less than a third of the cut OPEC claimed.
The cut also failed to meet expectations that the 10 members governed by quotas would agree to trim output back to the previous group limit of just over 24.5 million bpd during the second quarter, when seasonal demand is at its weakest.
GLUT LOOMS
Analysts said OPEC had effectively grabbed Iraq's market share after the U.S. campaign to unseat Saddam Hussein cut off Baghdad's nearly two million bpd of exports in mid-March. When those supplies return to market, however, traders fear a glut could quickly develop as the cartel struggles to reintegrate Baghdad into its quota system after a decade of sanctions. OPEC is scheduled to meet in Qatar on June 11, when top officials have indicated strongly they may cut output again given expectations that Iraqi oil could be back by then. Last week the U.S. military said some southern oilfields had already restarted to feed local refineries. Some 800,000 bpd of output could resume as soon as mid-May, the U.S. said, although this will depend on the United Nations agreeing a legal framework for exports to begin.
Before the war Iraq was producing up to 2.5 million bpd, of which 1.8 million was exported via the United Nations and another 400,000 bpd was smuggled to neighbouring countries. Iraqi exports were overseen by the U.N.'s oil-for-food programme for the last seven years, as part of U.N. sanctions imposed after Iraq's invasion of Kuwait. The United States is pushing to end U.N. control by lifting sanctions, but keeping a special U.N. coordinator in a low-level role. This is likely to meet resistance from Russia and France. Until the legal wranglings are sorted out, international oil traders and companies are unlikely to risk lifting the crude.//