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OPEC facing dark clouds on supply horizon

Roland Jackson

OPEC faces a period of static oil prices as traders track supply-side uncertainties surrounding Iraq, Iran and Libya, as well as Ukraine, analysts said Thursday.

The oil exporters' cartel opted this week to maintain its crude output ceiling, expressing confidence in the market despite global tensions keeping prices high.

OPEC, which will convene again in late November to assess the state of the market, remains happy with Brent oil prices hovering close to $110, benefitting producers.

"Long term we remain rangebound, $100 to $110 per barrel, which suits most OPEC members, and with persistent upside risks amid ongoing supply jitters in the Middle East and North Africa region," VTB Capital analyst Andrey Kryuchenkov told AFP.

"Sustained gains are hard to justify past $110, with the global supply growth still outpacing demand at this point given a fairly weak European demand and an economic growth moderation in China" he added.

Some cartel members are meanwhile pumping more crude to compensate for supply shortfalls in Iran, Iraq and particularly Libya -- which remains plagued by unrest.

Libya has been rocked by violence that has slashed the North African nation's output to less than 200,000 barrels per day, from a potential 1.5 million bpd.

"There is little risk that OPEC will lose control of the oil price to the downside the next six months," said SEB (Paris: FR0000121709 - news) analyst Bjarne Schieldrop.

"That OPEC does not change its overall target or ceiling does not mean that OPEC is not actively managing the market. Saudi Arabia is constantly managing its supply level to balance the market."

The cartel's 12 member nations left their collective oil production ceiling at 30 million barrels per day on Wednesday.

- Iraq violence sparks gains -

World oil (Other OTC: WOIIF - news) prices meanwhile advanced above $110 as traders seized on a fresh outbreak of violence in OPEC member Iraq.

The nation's provincial cities of Tikrit and Mosul have fallen to militants from jihadist group the Islamic State of Iraq and the Levant (ISIL).

Iraq's oil minister Abdelkarim al-Luaybi played down the impact, telling reporters in Vienna that most of the nation's crude production was in the south.

"We haven't any production from the region. All our production is from the south area, and from Kirkuk," Luaybi said Wednesday.

But spreading unrest in the south could spark an oil price spike, analysts argue.

"The situation in Iraq is concerning with Mosul taken over by ISIL," added Schieldrop.

"Increasing terror attacks in Iraq's southern (city of) Basra would probably drive oil higher."

Elsewhere, traders remain unsure how developments will pan out in Ukraine.

The West has accused Russia of fomenting unrest in neighbouring Ukraine since the ousting of pro-Kremlin (Berlin: KMLK.BE - news) president Viktor Yanukovych in February. Moscow denies the allegation.

Investors fear a full-blown conflict because the ex-Soviet state is a conduit for a quarter of European gas imports from Russia.

"Flows of gas and oil have come under scrutiny since the beginning of March, and any significant drop in oil flows from Russia into Europe will push prices higher," said Inenco analyst Gary Hornby.

"Oil prices will continue to be supported by the potential threat of oil supply issues.

"However, prices should drop if the current talks between Russia and Ukraine end on a positive note."

Iran's oil output meanwhile remains hit by Western sanctions over its disputed nuclear programme.

Tehran and Washington are currently locked in crunch talks that have raised hopes of a deal to defuse the long-running nuclear row, in a move that eventually lead to the lifting of those sanctions.

Iran's oil output could reach 4.0 million barrels per day in "less than three months" if Western sanctions are lifted over its nuclear energy programme, Oil Minister Bijan Zanganeh said in Vienna.

That compares with Iran's current production of about 2.7 million bpd, according to OPEC data.

Washington and the P5+1 are seeking solid commitments to ensure Iran's stated desire for a peaceful atomic energy programme is not a covert attempt to build a nuclear bomb.

Schieldrop cautioned that there was no imediate prospect of rebounding oil output from Libya or Iran over the next six months.

- Traders eye US oil -

Added to the global supply picture, however, analysts contend that any oil price gains in the coming months will be limited by abundant supplies and surging production in the United States.

The US -- which is the biggest crude consuming nation in the world -- is experiencing a shale energy boom.

"The recent unrest in eastern Europe and the Middle East has kept a risk premium built into prices," added Hornby (LSE: HRN.L - news) .

"However, US oil production continues to cap any further gains in prices.

"US oil production is currently at its highest since 1986, alleviating some of the concerns over supply from other sources, which suggests that this sideways trend could continue until fundamentals change drastically."