EGYPT - The Oil Market Perspective.

World crude oil prices in 2006 are expected to be volatile as in the previous three years. The peak for WTI light/sweet crude oil in 2005 was reached on Aug. 31 at $70.85/barrel. There can be higher peaks in 2006 as world oil demand keeps rising and the US market might be hit again by hurricanes. But there may also be a fall in oil prices as at times supplies could increase.

The year began with the European Union (EU) worried by the prospect of a shortage of natural gas supply from Russia, in view of its conflict with Ukraine. On Jan. 1 the state-controlled Russian monopoly Gazprom began reducing gas supplies Ukraine as the latter turned down a last-minute offer to raise prices gradually through the first quarter of 2006. This is the first Russian cut since the collapse of the Soviet Union, posing a threat to the stability of gas supplies to the EU. Ukraine insisted it needed a period of year of transition to market prices to avoid damage to its industry and economy. Gazprom was demanding a price of $230 per 1,000 cubic metres, up from $50 Kiev has been paying.

The dispute between Moscow and Kiev has demonstrated Russia's increasing self-confidence as one of the world's biggest energy suppliers. But this has provoked alarm in the EU, which gets 25% of its gas from Russia - most of it through the massive Brotherhood Pipeline across Ukraine. The European Commission was hosting an emergency meeting of energy ministers from the 25 EU states on Jan. 4 to discuss possible sharing of gas reserves and other contingency measures.

Ukrainian President Viktor Yushchenko said in a TV interview at night on Dec. 30 the maximum Kiev was prepared to pay in 2006 was $80. Alexei Miller, chief executive of Gazprom, said its actions would be "clear and resolute". He rejected a proposal from Yushchenko to freeze the $50 price for 10 days while independent experts assessed a fair price. Miller said: "If Ukraine does not sign a gas delivery contract with us before the beginning of 2006, all gas shipments from the territory of the Russian Federation to consumers in Ukraine will be stopped at 10 am Moscow time on Jan. 1". Russian TV was to broadcast live the turning off of supplies at Gazprom's Moscow control room.

Both sides suggested on Dec. 30 that gas exports to Central and Western Europe would not be affected. But Ukraine said earlier last week it had the right to take 15% of gas passing through the export pipeline as a transit fee. Gazprom said in a letter to European customers it "could not exclude the risk" that Ukraine would take unsanctioned gas from the pipeline.

Ukraine gets 25 BCM of its 80 BCM/year consumption from Russia, with 36 BCM/year coming from Turkmenistan. Ukraine's president dismissed Putin's offer of a loan of $3.6 bn and said his country intended to pay no more than $80 per 1,000 cubic metres.

EU officials insisted that fuel supplies to a winter-bound Europe were not likely to be badly affected by the dispute. But Germany, the biggest consumer and importer of natural gas in Europe, gets around 30% of its gas supplies from Russia through Ukraine. German government spokesman Ulrich Wilhelm told reporters Berlin had been in contact with both sides "at working level, but is not seeking a role as mediator". He said Berlin was following Moscow-Kiev talks "very attentively" and his government had "an emphatic interest in these negotiations being concluded as soon as possible with a compromise...acceptable to both sides, in the interest of secure gas supply to Germany and Western Europe".

President Yushchenko promised not to impede transit supplies to Europe. But Gazprom warned that Kiev might divert exports destined for Germany, Italy and France. Earlier last week, Ukraine's Prime Minister Yuri Yekhanurov said Kiev would take 15% of the Russian gas crossing its territory if Moscow cut delivery for Ukrainian use. The Guardian on Dec. 31 quoted a Gazprom spokesman, Sergei Kupriyanov, as saying the Russian gas company could not prevent Ukraine siphoning from transit pipelines. He said: "Technically speaking, they could take all the gas".

Several German politicians urged Gerhard Schroder, Germany's former chancellor and soon to become chairman of the supervisory board of Gazprom's pipeline subsidiary, to use his influence with President Putin to defuse the row.

Gazprom said that, if necessary, it will offset decreased exports to West Europe by pumping more through its pipeline across Belarus. It said it could also use underground gas storage reservoirs.

Britain does not receive direct supplies from Russia, but a drop in supply to Europe would mean less gas being pumped through the Interconnector, the pipeline which links the UK with the continent. Anthony Brenton, the UK ambassador to Moscow, called for a smooth resolution of the conflict.

Officials in Kiev on Dec. 30 said Ukraine had enough gas in underground storage to enable it to meet its needs through the winter. Ukrainian consumers have accepted the assurances with little sign of concern. In Lviv, an 800,000-strong city close to the Polish border which relies on gas for much of its heating, residents were busy shopping on Dec. 30 ahead of New Year celebrations. Oleksandr Danylyuk, adviser to Prime Minister Yekhanurov, was on Dec. 31 quoted as saying: "There is no panic on the streets nor in the halls of government".

Ukraine maintains gas storage facilities with a capacity of about 32 BCM - about 40% of the country's annual consumption. A Naftogaz spokesman said the country had enough "to keep us afloat through...winter under normal circumstances". Directors of major industrial enterprises said they could quickly adapt to other energy sources such as coal or oil.

Moscow's demand that Ukraine pay $230 for Russian gas is part of a wider move by the Kremlin to end subsidised supplies to former Soviet republics and has provoked the biggest rift between the two neighbours since the late 2004 "Orange Revolution" in Kiev. That brought to power Yushchenko, who has turned Ukraine's gaze towards the EU and NATO and wrenched it out of Russia's orbit.

By stopping supplies, However, Russia risked damaging its claim as being a reliable energy supplier, just as it was on Jan. 1 taking over the G8 presidency with energy security as a main theme. The European Commission on Dec. 29 said the reliability of Russian supplies was "of the highest priority" and it was watching the Moscow-Kiev dispute closely. Putin, in televised remarks, said subsidised gas supplies had been acceptable while Russia and Ukraine were part of a planned economy but no longer reflected economic realities. Russia was not prepared to subsidise Ukrainian businesses or foreign companies on Ukrainian soil. Yet Belarus, Moscow's most loyal former Soviet ally, has contracted with Gazprom to pay just $46 per 1,000 cubic metres.

Gazprom earlier said it had signed a deal to buy more gas from Turkmenistan, the second-biggest gas producer among the former Soviet republics, by more than 50% to 30 BCM in 2006. That would leave less spare Turkmen gas available to Ukraine to cover any reduction in Russian supplies. Ukraine, buying 25 BCM from Russia, takes 36 BCM/year from Turkmenistan and the latter's gas exports flow through Gazprom's pipelines. But Ukraine said it already had a contract with Turkmenistan to buy 40 BCM in 2006.

Moscow is using its dominant position in oil, too, to further its interests. It was to cut oil supplies to Lithuania from Jan. 1 in an attempt to press the Baltic republic to favour a Russian buyer over rival Polish and Kazakh bidders for the strategically important Mazeikiu oil refinery.

Moscow is squeezing potential competitors in the FSU - notably Kazakhstan - which are trying to develop their energy industries independent of Russia. It is attaching tough terms to allow Kazakhstan expand the CPC crude oil pipeline from the vast Tengiz field in the Caspian to Russia's Black Sea port of Novorossiysk. This is crucial to plans by the field's operator, Chevron, to ramp up oil production in 2006. The US major was counting on the expansion of the CPC outlet for its oil production programme for 2006-12.

In December Russia began construction of the $5 bn North European Gas Pipeline, an export route under the Baltic Sea to Germany which will bypass the Baltic states, Ukraine and Poland. Moscow has already hinted to US officials and international energy executives that it intends to use its G8 presidency to assure the world it can be a pivotal energy supplier to Europe, the US and Asia.