ABU DHABI - The Global Oil Market Perspective.

Crude oil prices have been above $30/barrel since the unrest in Venezuela escalated into general strikes from early December 2002 to February 2003; and since late 2002 OPEC has not activated its $22-28/b price defence band, with some members now calling for the band to be raised to $30-40/b in view of a 33% fall in the value of the US dollar in the past two years. Front-month WTI peaked at $55.76/b on Oct. 25, 2004.

World crude oil prices are likely to retreat, rather than keep rising, in 2005 - barring big political shocks. They surged 32% in 2004. The IEA's chief economist Fatih Birol told Reuters on Dec. 29: "We think in general demand will grow a little less in 2005 [than in 2004]. We think supply will increase in a positive way. If there is no significant geo-political event, we can say oil prices will find more moderate levels in 2005".

Crude oil has rallied as a big surge in world demand - mainly in China - forced OPEC producers to pump at their highest level in 25 years, leaving little spare capacity to deal with unexpected outages and sharpening concern over oil supply security. At one time in the autumn, OPEC production reached 30.60m b/d with Saudi Aramco's output exceeding 9.7m b/d.

On the last trading day of 2004 for WTI, the price of the US light/sweet crude oil stood at $42.95/b - up more than $10 on the year, but $12 below the contract's all-time high of $55.67/b on Oct. 25. Front-month Brent at the IPE has been trailing behind at a differential of $2-4/b below WTI. Brent is a light/sweet blend of crude oils produced in the British sector of the North Sea and is a global marker that can trade worldwide; WTI has direct influence over Brent but does not trade outside the US. Dubai, a sour crude, in 2004 traded at a discount to Brent varying between $3.50-6.50/b.

A study conducted by the IMF and IEA on the impact of high oil prices on the global economy has showed that a price above $40/b had trimmed growth in OECD economies by 0.4 percentage points. Birol said: "The impact is greater in developing countries", with growth cut by 1.0 point in India and 1.6 points in African countries. "In general global economic growth will be cut by 0.5 percentage points if we continue above $40... In particular 2004 growth estimates have been revised down in the euro region, Japan, the United States and India", he said.

The IEA was set up in 1974 to combat the price setting and supply power of OPEC, after the first oil crisis, and advises 26 OECD nations on energy policy. But in the more recent years the IEA has been much less hostile to OPEC - often advising, rather than criticising, OPEC on policy options.

Birol said the world economy was far from facing a danger of recession as a result of high energy prices. "If oil prices continue in 2005 at 2004 levels this will be a significant risk for all countries. But it is difficult to determine when this will lead to recession", he said.

Front-month WTI was up 70% from the start of 2004 at its Oct. 25 peak, but then abruptly halved those gains on signs that high fuel costs were weighing on economic growth. A mild US winter and year-on-year surplus in US crude oil stocks have also prompted speculative funds to take money out of energy and pursue equity or money markets.

Falling prices spurred OPEC to trim 1m b/d of excess supply from Jan. 1, hoping to prevent a rapid build-up in stocks its members fear could drag prices lower when demand wanes after the northern winter. The high-risk period where OPEC is concerned is the second quarter of 2005, when world oil demand will fall considerably.

Birol said a moderate oil price for the IEA would be around $25/b but that reaching this level may take some time. He said high oil prices in the long-term would have a negative impact on OPEC countries, leading to a decline in their exports over a 25-year period.

APS Energy Group has warned that, even at $25/b in today's US dollars, many alternative sources of fuel - including conversion of synthetic crude from huge bitumen reserves in Venezuela and tar sands in Canada - have become competitive already. If OPEC keeps raising the market value of conventional oil in the next two to three years, it would be pricing itself out of important energy markets.

Birol said increased crude oil supply of some 2.5m b/d after the launch of seven new production projects in the Middle East, including Saudi Arabia's Qatif fields, would exert some downward pressure on prices in 2005.