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Oil prices retreated Friday in anticipation that the

Organization of Petroleum Exporting Countries

will announce a half-million-barrel increase in its daily oil production next week.

The benchmark futures contract for December delivery of crude oil settled down 97 cents on Friday, at $32.74 on the

New York Mercantile Exchange

, after climbing as high as $33.80 earlier in the day.

OPEC's president, Ali Rodriguez, said earlier this week that the organization would announce the production increase on Monday if prices remained high through the week, which they have. He reiterated that position Friday.

Under an informal agreement reached earlier this year, OPEC members said they would increase production quotas if the price of their basket of crude oil blends stayed above $28 a barrel for more than 20 consecutive working days. Friday would be the 20th day in which prices remained above the price band. OPEC plans to announce Friday's basket price on Monday.

Despite signs that domestic inventories are beginning to build up, and indications that more than half of the 30 million barrels of oil

President Clinton's

ordered to be released from the

Strategic Petroleum Reserve

will be delivered in November, oil prices have remained in the $30 range. The price jumped as high as $37 a barrel two weeks ago as tensions in the Middle East

escalated .

The price of oil rallied again on Thursday after Iraq threatened to suspend its oil exports unless it could be paid in euros instead of U.S. dollars. But it gave up nearly all its gains on Friday, as it seemed more likely that OPEC would increase its production ceiling on Monday.

Phil Flynn, analyst at

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Alaron Trading

, said he was surprised that the price did not come down earlier after the Clinton administration indicated it had no objection to the currency switch.

Iraqi production is constrained by sanctions applied by the

United Nations Security Council

, so it is not subject to OPEC production agreements.

Nonetheless, the

Energy Information Administration

, or the EIA, said Iraqi oil production increases over the past year are second only to Saudi Arabia's among OPEC members. In the third quarter, Iraq produced on average about 2.8 million barrels of oil a day. The EIA predicts Iraqi production will likely rise to 2.95 million barrels daily in the current quarter -- just short of its 3.1 million barrel daily production capacity.

The EIA estimates Saudi Arabia is producing about 9.31 million barrels of oil a day, already about 800,000 barrels-per-day above the official quota. Saudi Arabia, the world's largest oil exporter, is believed to be capable of producing as much as 10.5 million barrels a day. If the EIA's figures are correct, Saudi Arabia would not be able to compensate fully for the drop in oil supplies should Iraq suspend its exports.

"If it becomes obvious that Iraq oil is off the market, look for crude oil to rocket to the $40 area in a heart beat," Flynn wrote in a Friday research note, adding that he believed the market would test the Persian Gulf War highs of $40 to $41 a barrel.

Flynn said oil prices would have hit $40 already had President Clinton not ordered the release of oil from the Strategic Petroleum Reserve. Still, he adds, "We now know this was temporary and really didn¿t help supply anyway. Enter Sadaam (Hussein) and he might just get us there."

Analysts are not convinced that the widely anticipated increase of 500,000 barrels in OPEC's production ceiling will do much more to ease concerns over supply shortages.

Tim Evans, senior energy analyst for

IFR Pegasus

, said the increase in OPEC's production quota, set to go into effect at midnight on Monday, has been downplayed because of concerns that the actual production increase will fall short of that amount, and because the price impact is uncertain.

There are growing indications that OPEC is already pumping above production quota levels. The EIA said Saudi Arabia and the United Arab Emirates are the only OPEC members with significant capacity to expand production at all.

Still, Evans remains optimistic. He points out that this will be OPEC's fourth production increase since March, but he said it may be the first increase to succeed in producing a small supply/demand surplus.