OPEC oil output surge boosts surplus, despite higher demand

By Alex Lawler

LONDON (Reuters) - OPEC said its oil output surged in March, adding to a global glut, despite more evidence that the producer group's strategy of letting prices fall to hurt other producers is taking effect.

OPEC's report may reinforce the perception that major producers are staking out market share ahead of a potential rise in Iranian exports following its framework accord with world powers over its nuclear programme.

Thanks to lower output from the United States and other rival producers due to the oil price drop, the Organization of the Petroleum Exporting Countries said demand for its oil this year would be 80,000 barrels per day (bpd) higher than previously thought.

Its monthly oil market report also confirmed industry estimates of a surge in OPEC production in March, which jumped by 810,000 bpd - ten times the increase in 2015 demand for OPEC crude - led by record output in Saudi Arabia and higher Iraqi exports.

"The strategy of OPEC to put pressure on the high-cost producers is working, but the individual members seem to have moved off of that focus and are instead producing as much as they can," said Jamie Webster, analyst at IHS in Washington and an OPEC expert.

"OPEC's strong production growth points out that they still have the capacity and willingness to swing up - unfortunately the global market doesn't require it at this time."

Oil (LCOc1) fell more than $1 to $62 a barrel after the report was released.

Last year, OPEC refused to cut its output despite a price collapse, seeking to recover market share by slowing higher-cost production in the United States and elsewhere that had been encouraged by OPEC's previous policy of keeping prices high at around $100 a barrel.

In Thursday's report, OPEC raised the forecast demand for its oil to 29.27 million bpd in 2015. It now expects rival non-OPEC supply to rise by only 680,000 bpd, a downward revision of about 160,000 bpd.

OPEC, which pumps a third of the world's oil, is more than filling the gap. According to secondary sources cited by the report, the group pumped 30.79 million bpd in March, an increase of 810,000 bpd from February.

Saudi Arabia, the driving force behind's OPEC's refusal to cut output in 2014, told OPEC it raised output to 10.29 million bpd in March, the highest rate on record.

If OPEC keeps pumping at the same rate, the report indicates there will be an excess supply of 1.52 million bpd in 2015 and 2.78 million bpd in the first half - much more than the surplus expected last month.

OPEC released its report a day after the International Energy Agency, which advises industrialised countries, also reported a surge in OPEC production which it said could reflect a jostling for position over market share.

Crude inventories in the United States have ballooned to record highs, but OPEC expressed confidence that these would be eroded by a coming rise in seasonal crude demand as well as lower output.

"Given expectations for lower U.S. crude oil production in the second half of the year, these higher refinery needs will be partially met by crude oil stocks, reducing the current overhang in inventories," OPEC said.

(Editing by William Hardy)