ALGERIA - The Oil Market Perspective.

As OPEC has suspended its $22-28/barrel price defence band, indicating a preference for a higher price in view of the fall in the US dollar's value, the IEA has come up with a subtle warning that the exporter group should not cut production during its ministerial conference in Isfahan on March 16. The IEA argues that a fall in the world's oil demand during the second quarter will not be big enough to justify a panic decision by OPEC.

In its monthly oil market report, the IEA on Feb. 10 revised up its 2005 world oil demand growth forecast by 80,000 b/d to 1.52m b/d versus 2004, estimating demand for this year at 83.92m b/d. Higher US and Chinese growth meant the IEA revised up its estimates of demand in the fourth quarter of 2004 by 200,000 b/d to 84.4m b/d.

The revision was due in part to a rise in Chinese demand growth in December of just over 10%, or 50,000 b/d, against November. Asian demand growth for 2005 was revised up by 90,000 b/d compared to the IEA's previous report, mainly due to a more robust outlook for Chinese naphtha demand and South-East Asia demand growth in general.

The IEA said falling global oil supplies and growing demand could alleviate the need for OPEC to make any further supply cuts in the short term. For the first time in two years, it noted output from OPEC came in below demand for the group's crude. OPEC's output in January fell 770,000 b/d compared with December to 28.8m b/d, as the group reined in quota busting as pledged in December. This puts the group's total production 300,000 b/d under the call on OPEC for the first quarter of this year, which the IEA set at 29.1m b/d.

"With the potential first quarter stock draw this implies, talk of further production curbs in the short term may be premature", the IEA said in its monthly oil market report. At its Jan. 10 meeting, OPEC decided to keep its production ceiling unchanged at 27m b/d, with Iraq excluded from this. But OPEC ministers have since indicated that an agreement to cut before March 16 could be made by telephone if oil prices fall or oil stocks build too much in the second quarter.

However, downward revisions to non-OPEC supplies from Canada, Norway and the US Gulf of Mexico, and a drop in production from Russia for the fourth straight month, could take some of the pressure off OPEC, the IEA said. The agency revised down Russian output, the main driver for non-OPEC supply growth, to average 9.58m b/d in 2005 as uncertain regulatory and fiscal environments combined with taxes began to hit investment and hence production.

Although total OECD industry oil stocks fell sharply in December by 85m barrels to 2.577 bn barrels, pushing forward cover back down to 51 days, the IEA said the situation was finally looking more comfortable. It said: "OECD crude and product stocks have regained a more comfortable position.

According to the IEA, Iraqi oil output fell 160,000 b/d in January from the previous month to 1.79m b/d, as sabotage of oil infrastructure in the north combined with weather-related loading delays in the south to hit production. This put supplies from the OPEC-10, excluding Iraq, at 27m b/d in January - a drop of 610,000 b/d from December.

Iraqi production has been in a declining trend for the past nine months, and this will continue to be a factor propping up prices, said David Fyfe, one of the authors of the IEA report. The IEA raised its forecast for the 2005 call on OPEC for each quarter, with the second quarter coming in at 27m b/d.

World oil supplies were down 645,000 b/d in January on the month at 83.6m b/d, mostly on the OPEC cuts, the IEA said. Saudi Arabia contributed the most to the cuts by trimming output 350,000 b/d to 9.1m b/d in January. The UAE and Kuwait cut production by 90,000 b/d and 100,000 b/d, respectively. Other members made more modest reductions, except Algeria and Nigeria, which increased supplies.

The IEA said the seasonal drop in second-quarter oil demand "has to be seen in context", as "the projected dip...may seem significant" at 2.1m b/d, "but this has to be offset against an anticipated first quarter stock draw and the high annual call on OPEC over the year". The seasonal drop-off in oil demand for the April-June quarter - the period when OPEC most fears a demand slump that could crush prices - against January-March is estimated at 1.95m b/d. Although that is higher than last year, it is still well short of the 3m b/d fall seen in 2003.

At the close of its ministerial meeting on Jan. 10, an OPEC statement said: "Aware of the seasonal drop in demand in the second quarter, and given the stock-build, which might be accentuated in light of the market situation, the conference further decided... that its president should make consultations ahead of the next ordinary meeting of the conference... to ensure that a timely cut could be made, as appropriate".

On the $22-28/b price band for its basket of seven crude oils, OPEC said: "After reviewing the evolution of the OPEC Reference Price since its inception in 2000, the conference said that prices have remained outside the band for more than a year due to market changes that have rendered the band unrealistic and has, therefore, decided to temporarily suspend the current price band, pending completion of further studies on the subject". OPEC ministers have since justified prices well above $28/b.

Gasoline supplies would play a bigger role in influencing oil prices in May as the "driving season" starts in the US - when motorists hit the roads for their summer vacations.