EUROPEAN PRICES SINK ON SURGE IN OPEC OUTPUT

EUROPEAN PRICES SINK ON SURGE IN OPEC OUTPUT

European spot oil prices closed the week at two-month lows, responding to an unexpected surge in Organization of Petroleum Exporting Countries output and a sharp rise in unsold crude.

Prompt deliveries of North Sea Brent, the most actively traded spot crude, sunk below $15 a barrel and April shipments were quoted Friday at $15.10, down 50 cents on the week. Dubai Fateh, the key Middle East spot crude, eased 70 cents, closing Friday at $14.10 a barrel, more than $3.50 below its official OPEC selling price.European prices were also dragged down by U.S. Department of Energy figures showing an 8.5 million barrel increase in U.S. crude oil stocks the previous week.

Traders were puzzled by the sudden surge in OPEC output to nearly 18 million barrels a day in the first three weeks of February compared with 17.2 million b/d in January.

Despite the higher output, sales appear to have stagnated at just 16.5 million b/d, suggesting a massive stockpiling by OPEC producers determined to pump to the limit of their national quotas despite the dearth of buyers.

Saudi Arabia, Iraq, Iran and Libya were reported to be storing their unsold crude in tankers at sea or into storage tanks in North West Europe, the Mediterranean and the Caribbean. Iran alone is said to be stockpiling 300,000-400,000 b/d of its nearly 2 million b/d output.

However, despite the rise in production and sliding spot prices, OPEC producers, including Saudi Arabia, are fiercely resisting demands by their customers for discounts.

Expectation of weaker prices has forced refiners to cut their liftings even at $16 a barrel. Oil companies are reluctant to enter into long-term commitments for fear that producers might at any time embark on an aggressive sales campaign to move their unsold stock, thus driving down prices.

Traders and refiners in Europe are playing a waiting game, withdrawing

from the market until prices are perceived to have bottom out. But with demand, already depressed by Europe's warmest winter in 30 years, falling off ahead of the onset of spring, traders are bracing for further declines. The floor for Brent is probably around $14-$14.50, they say.