ABU DHABI - The Global Petroleum Perspective.

The front-month value at the New York Mercantile Exchange (NYMEX) of West Texas Intermediate (WTI), a light/sweet crude oil which does not trade outside the US, has become a benchmark for oil prices worldwide. According to a Jan. 11 forecast by the US Energy Department's Energy Information Administration (EIA), the front-month price of WTI is likely to remain in the range of $42-$43/barrel in 2005 and 2006. It put the price average for WTI in the first quarter of 2005 at $43/b, down $3 on its previous estimate. It projected global oil demand growth for 2005-06 to average about 2.1m b/d. This is dangerously close to OPEC's spare capacity to produce crude oil by end-2006, which means WTI's price will remain high.

The week ended on Jan. 14 with front-month WTI at NYMEX closing at $48.38/b, up 34 cents from the Jan. 13 level following a Jan. 12 release of US weekly inventory figures showing a bigger-than-expected drop in crude oil stocks alongside forecasts of cold weather in the US North-East. Prices have rallied on supply outages in Norway, Nigeria and Iraq. Traders fear that violence leading up to or after Iraq's Jan 30 elections could hamper crude oil flows. The front-month price of Brent on the International Petroleum Exchange (IPE) on Jan. 14 was $44.96, down 13 cents from Jan. 13. Dated Brent on Jan. 14 settled at $45.51, down 23 cents, while spot WTI at Cushing closed at $48.38, up 34 cents from Jan. 13.

NYMEX heating oil futures on Jan. 14 closed at $1.35/gallon, up 98 cents from Jan. 13. NYMEX gasoline closed at $1.27/g. NYMEX natural gas closed at $6.4/m BTU on Jan. 14, down 5 cents from Jan. 13. The Henry Hub spot price was $6.44/m BTU on Jan. 14, up 41 cents. The New York City Gate price of natural gas was $9.03/m BTU, up $2.23 from Jan. 13.

OPEC's oil ministers meeting in Vienna on Jan 30 are unlikely to lower their formal 27m b/d production ceiling as Saudi Arabia has indicated it will keep its 9m b/d output unchanged in February. Nigeria's presidential adviser on petroleum Edmund Daukoru on Jan. 13 said: "If prices stay as they are, I don't think we will have to take further action". Iran's oil minister Bijan Zanganeh recently said he did not believe WTI futures would fall below $40/b but that OPEC would have to cut production if they did.

The peak WTI price of $55.67/b reached on Oct. 25, 2004, may be overtaken this year if world oil demand remains strong. This is because spare oil production capacity now is limited to 2.7m b/d, mostly in Saudi Arabia and Abu Dhabi. If world demand in 2005 rises by 1.4m b/d to 83.8m b/d - as an annual average forecast by the IEA - this means the spare capacity will be less than 2% of global requirements.

None of the reasons which created the price spike in 2004 - the strong thirst for crude oil in China and India, the dismemberment of the Russian oil giant Yukos, the terror strikes against oil facilities in the Middle East - has gone away. Like the hurricane season in Florida, the oil market may be facing even more violent storms.

The world's spare capacity production capacity lies in OPEC - mainly in Saudi Arabia and Abu Dhabi. This has been the oil market's main source of liquidity. In 2002, spare capacity amounted to nearly 10% of the 76m b/d world oil market. In 2003, with demand climbing to 78m b/d, spare capacity dropped to about 5%. This cushion was sufficient to prevent an oil crisis when a labour strike in Venezuela, ethnic riots in Nigeria and a war in Iraq took major producers out of the market for extended periods. Now, mainly because of an increase in demand in Asia, OPEC is called on to supply more crude oil than expected, biting into its spare capacity, which has dropped to a dangerous level.

Despite Saudi Arabia's reassurance that it has an immediately available spare capacity of 2.3m b/d and is accelerating plans to bring new oilfields into production, this is all too little, too late. Unless these is a recession, demand for OPEC crude oil would rise by more than 2.7m b/d by end-2006, and production from new fields might take a long time to be brought online. At the same time, no oil producing country outside OPEC seems to be willing to create new spare capacity by investing billions of dollars in oil infrastructure that would sit idle most of the time.

The EIA recently forecast that Saudi Arabia's crude oil production capacity could reach 18.2m b/d by 2020 and 22.5m b/d by 2025. But it admitted that the Saudis saw the 2025 prediction as "unrealistic". The EIA said Saudi Arabia, which produced around 10.4m b/d of crude oil, NGLs and other petroleum liquids in 2004, maintains crude oil production capacity of 10.5-11m b/d. Its production figure includes output from the neutral zone shared with Kuwait. But APS Energy Group says the Saudi capacity is 11.3m b/d. In late 2004 Saudi Petroleum and Mineral Resources Minister Ali Naimi said the kingdom could raise production capacity to 12.5m b/d and even 15m b/d from already existing oilfields - though the EIA said current depletion rates made it a challenge to achieve these goals.

China's crude oil imports in 2004 rose 35% to 120m tons, the Customs General Administration of China said on Jan. 12, as local output failed to meet the country's rising demand for fuels. The State Information Centre said in November China's oil consumption in 2004 may have risen to 300m tons from 250m tons in 2003. Rachel Tsang, an oil and gas analyst at Daiwa Securities SMBC in Hong Kong, said China's oil imports accounted for 41% of consumption in 2004. She added: "China's dependence on oil imports will grow. Local output is not meeting demand". She said China's oil imports this year may rise 18% to 142m tons and imports may meet about 43% of consumption in 2005. China may also cut exports of crude oil this year to help meet local demand.

China's economy grew 9.5% in the first nine months of 2004, lifting demand for chemicals and fuels as carmakers and other manufacturers raised production. China is the world's second-biggest oil consumer and the world's second biggest energy market after the US. The country's oil exports fell 34% in the first 11 months of 2004 to 4.7m tons, according to customs data released last month. China's oil production in 2004 probably rose 2.3% to 174m tons as demand for diesel, gasoline and other fuels rose in the country, Zhang Xiaoqiang, deputy chairman of the National Development and Reform Commission, said recently.

Iraq's oil infrastructure is widely exposed to sabotage as the US forces there seem unable to secure the country in view of an escalating insurgency. Interim Prime Minister Iyad Allawi has said attacks on oil and electricity infrastructure had cost Iraq more than $10 bn in revenue since the US led invasion of the country. He told the state-run Al-Iraqiya TV on Jan. 11: "Some of these losses resulted from attacks on oil pipelines feeding storage areas as well as attacking oil tankers carrying imported gasoline" to Iraq. Allawi was referring to the daily attacks on gasoline tanker trucks heading into the country from Turkey which are often targeted, with the drivers kidnapped or killed. Iraqi Oil Minister Thamer Ghadban warned that insurgents were waging an all-out war on the country's oil industry.

Last month Wahhabi terrorist leader Osama Bin Laden ordered his supporters to sabotage oil facilities in Iraq and the Persian Gulf, in an audiotape attributed to the Al-Qaeda chief broadcast on an Islamist website. Insurgents have targeted the anemic power infrastructure as well. In late December, they fired mortars at the Dora refinery in south-western Baghdad, which feeds the capital's main power plant. They have set fire to a feeder line to a power plant in Mussayeb, south of Baghdad.