Magazine article The Middle East

The Threat of War Underpins World Oil Markets; the Price of Crude Oil, Has Surged 40% This Year amid the Continuing Risk of Disruption in the Middle East Region, Which Accounts for One-Third of Global Production and More Importantly, Holds 69% of Total Proven Oil Reserves. (Oil)

Magazine article The Middle East

The Threat of War Underpins World Oil Markets; the Price of Crude Oil, Has Surged 40% This Year amid the Continuing Risk of Disruption in the Middle East Region, Which Accounts for One-Third of Global Production and More Importantly, Holds 69% of Total Proven Oil Reserves. (Oil)

Article excerpt

The main factors overhanging oil markets are the probability of a "Gulf War II", supply/demand fundamentals and the state of global economy. Cambridge Energy Research Associates (US) estimates that a "war premium" of $3-$5 per barrel is factored into oil prices.

Rilwanu Lukman, President of the Organisation of Petroleum Exporting Countries (OPEC), said "there is now a high level of security in the oil market," thanks to better cooperation among OPEC and non-OPEC producers. Between 2000 to early November 2002, Brent blend (benchmark for two-thirds of world's oil) has averaged $25.8 a barrel, up from $16.88 over 1997-99. Since last March, the OPEC basket price has remained comfortably within the cartel's preferred band of $22-$28. Obeid Al Nasiri, the UAE's Oil Minister, believes the target price of $25 is fair to producers and consumers. Major oil exporters have enjoyed hefty windfall gains over the past three years. OPEC-10 revenues were estimated at $205 billion in 2001.

The Arab-dominated OPEC rightly claims that higher prices and market volatility reflect geopolitical uncertainties and speculative buying, rather than genuine supply-constraints. The Centre for Global Energy Studies (CGES) notes: "Prices remain much higher than seems to be justified, with global oil stocks neither too high nor too low. Forward stockcover looks comfortable." In late September, crude prices hit a 19-month high of $30 in New York, compared to $18 in mid-January. Recently, oil futures are showing weakness because some hedge funds have liquidated their long positions on the assumption that hostilities seem unlikely in the short-term. But long-dated contracts for March/June 2003 remain expensive, thus reflecting the likelihood of the US invading Iraq, which boasts probable oil reserves of 220-300 billion barrels.

In contrast to previous winters, energy usage over the coming northern hemisphere winter may be subdued, reflecting sluggish global growth. The International Energy Agency (IEA) anticipates growth in fourth-quarter oil consumption at 1.6 million barrels a day (b/d). Following the milder 2001/02 winter, middle distillate stocks are currently above their normal seasonal range. Consequently, refiners in the Organisation for Economic Cooperation and Development (OECD) importing-countries during autumn were under less pressure to undertake large-scale stockpiling. Total OECD industry oil stocks in August were estimated at 2,620 million barrels, equivalent to forward-demand cover of 55 days. However, a severe winter in the US and Europe would benefit producers by creating robust fuel demands, especially of heating oil, leading to runs on OECD commercial oil inventories.

There are concerns about protracted falls in major stock markets, led by Wall Street and the possible spillover effects on business investments and consumer spending. This increases the risk of a "double-dip" recession in America and, by extension, the world economy. A renewed economic downturn would further hit energy demand, exerting downward pressure on prices.

More recently, OPEC-10 real production is averaging over 24.5 million b/d (compared to the official ceiling of 21.7 million), led by Algeria, Libya and Nigeria. According to a Reuter's survey, October's production (excluding Iraq) was 24.9 million b/d.

Petroleum Finance Corp. (PFC), comments: "Everyone is producing what they want." This overproduction is, in fact, preventing prices rising above $30. Ali Al Naimi, Saudi Arabian Oil Minister, said: "OPEC will continue to play an important role in this balancing act of trying to maintain a stable oil market at a reasonable price and equilibrium in supply and demand."

There is a 25% probability of OPEC-10 agreeing to a quota-hike of 500,000-700,000 b/d during its 12 December meeting in Vienna.

Meanwhile, supplies from non-OPEC sources, principally Russia, Central Asia (Kazakhstan and Azerbaijan), offshore West Africa and Mexico have expanded in recent years, thanks to sustained investments into upstream sectors. …

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