IRAN - The Global Market Perspective.

Oil pricing now is mainly in the hands of speculators in such futures markets at the New York Mercantile Exchange (NYMEX) and the International Petroleum Exchange (IPE) in London. They are pricing light/sweet crude oils high for clear reasons: a decline in the supply of these grades, a shortage of refineries which can profitably turn heavy/sour grades into fuels clean enough to be used in markets where the economy still can afford them and, most important, to make a profit from futures trading. That the world's main oil producers are not very stable makes the speculators more nervous and more perceptive of a looming shortage, buying more oil futures whenever the front-price of WTI - the light/sweet grade which physically does not trade outside the US but does influence IPE Brent, hence oil prices worldwide - goes down; so the price goes up again.

What this means is that speculation can at times become far more powerful than the physical reality, which means perception can at times be more important than reality. This is the logic of the speculation business. What makes the situation potentially dangerous, however, is that speculators motivated by profit want their perception to become a reality. But the actual situation is not as simple as that; when perception of demand suddenly turns bearish and futures prices decline, the fall becomes precipitate and, as a result, prices of physical oil collapse - sometimes against the logic of those involved in producing or trading in physical oil. Prices collapse after the speculator has perceived a global recession. When will that happen? It is a trillion dollar question (see omt11 & omt13).

In its twice-yearly World Economic Outlook, the IMF on April 8 predicted that in 2030, the average price of crude oil would stand in the range of $39-$56/barrel in real terms. In nominal terms, without adjusting for inflation, the price would be $67-$96/b, it said, due to "exploding" demand for cars as countries such as China and India spend their new-found wealth.

Fears of an economic crunch have intensified, with front-month WTI at NYMEX up by around 40% since the start of the year to surpass $58/b for the first time. IMF chief Rodrigo Rato warned last week that the high oil prices would shave between 0.25 and 0.5 percentage points off global economic growth in 2005. Strong growth and high deficits in the US, compared with lackluster growth in Europe and Japan, have resulted in global imbalances with which the financial system has been able to cope so far. "But if oil prices, inflation and currency movements trigger abrupt changes, the situation could deteriorate dramatically", Rato told the German business daily Handelsblatt.

Rising demand for gasoline and diesel coupled with lack of refining capacity in the US, the world's biggest oil market, is one factor blamed for record-high prices. But surging demand in emerging economies, headed by China and India, is high up the list.

Presenting part of the Outlook report on April 7 ahead of its full release this week, IMF officials said high oil prices were now a "permanent shock" for the world. In response to a March 30 Goldman Sachs study that front-month WTI at NYMEX could hit $105/b during a "super-spike" period in 2005-06 (see News Service of this week's APS Diplomat Package), which roiled the markets, senior IMF economist Raghuram Rajan said: "To the extent that there is some kind of a supply disruption, $100 a barrel does not seem outlandish". Rajan said such a price range was not the most likely scenario, explaining: "The point that we want to make is that the market is tight. So large movements either in demand or in supply can have significant effects on price".

The IMF report said oil consumption will increase from about 82m b/d in 2004 to almost 140m b/d in 2030. China alone will contribute almost a quarter to the increase in demand between 2004 and 2030 due to its fast economic growth and large population, the IMF said, adding: "This strong growth in demand will mainly be fuelled by improving standards of living in developing countries. For example, based on the experience of other countries, China is reaching the stage of per capita GDP where transport demand will explode because more and more people will buy cars". The number of vehicles in China could rocket from 21m in 2002 to almost 390m in 2030, the IMF forecast.

May WTI and Brent began to fall on April 6 after the EIA reported a big rise in US crude oil stocks. The week ended on April 8 with May WTI at NYMEX closing at $53.32/b, down 78 cents from the previous session, and May Brent at the IPE closing at $52.89, down $1.15. Spot WTI at Cushing settled at $53.32, down 79 cents. Dated Brent closed at $52.06, down 24 cents. NYMEX heating oil on April 8 closed at $1.4972/gallon, down $3.11/g. NYMEX gasoline closed at $1.5366/g, down $3.14. NYMEX natural gas on April 8 closed at $7.24/m BTU, down 12 cents, while the Henry Hub spot price was $7.27/m BTU. The New York City Gate price of natural gas then was $7.79/m BTU, down 26 cents.

Futures buying on April 7 - expected after the price fall on April 6 - pushed May Brent at the IPE up $1 to $56.27. May WTI then rose 75 cents to $56.60. Brent had traded in a wide range earlier, falling to $54.60 on April 6 after EIA data showed US crude oil stocks at their highest level in almost three years due to a 2.4m barrel rise. But US gasoline stocks, key before the summer driving season, fell 2.1m barrels, almost 1m barrels over forecasts. NYMEX gasoline rose 68 points to $1.6660/g, as the IPE's gasoil trimmed losses to fall $2.25 at $519/ton.