NIGERIA - The Oil Market Perspective.

All indications are that world crude oil prices will be high through the coming winter. If OPEC at its Sept. 24 ministerial meeting fails to raise production, the price of its basket of seven crude oils will exceed the high of $29.92/barrel reached on Aug. 8. In that case OPEC will be making a big mistake and the consequences of this will be felt in 2004.

The IEA on Aug. 11 raised its estimate of world oil demand by 250,000-400,000 b/d for the four years to 2004, giving substance to expectations that the price trend will be upward. It put global demand at 79.48m b/d in 2004. But APS Energy Group warns that, if OPEC lets market prices stay above its $22-28/barrel band through the winter, world demand in 2004 will be lower than the IEA's new estimate.

The IEA data form a basis for price forecasts made by governments and companies. Its Aug. 11 changes highlight the often shaky assumptions that underpin decisions, such as how to counter the drag that high oil prices have on the world's faltering economic recovery. The fault lay not with the Paris-based IEA, which had improved its statistics in recent years, but in an increasing reluctance by countries and companies, especially in the developing world, to share their inventory and supply data. Klaus Rehaag, editor of the IEA's market report, said on Aug. 11: "The observed numbers that we have are good, but I can't observe everything". Crude oil prices on Aug. 11 hovered at post-Iraq war highs of around $30/barrel.

Fuel prices in the US, the world's biggest oil market, have risen over the past three weeks. The rise is an early signal that prices of gasoline and heating oil will stay higher than usual through the end of the winter, in large part because of chronically low US inventories of crude oil and petroleum products. The average retail price of regular gasoline in the US on Aug. 16 was about $1.57 a gallon, 5 cents higher than a week ago and 19 cents more than a year ago. The main factor is the price of WTI crude oil, which reached $32.85/b at NYMEX on Aug. 8; that was its highest point since March 18, two days before the start of the war in Iraq.

US consumers only recently became aware that gasoline prices were edging higher, just as many began leaving on vacation. Drivers begin to complain when prices are closer to $2 a gallon. But the relatively high price of fuel caught most US consumers by surprise as they thought that, as things got more and more settled in Iraq, its oil would make its way back to the world market and that oil supplies would be more, not less.

Iraq is not the most important of several factors keeping inventories low and prices high, both in the US and in Europe. Equally important is the potentially explosive situation in Venezuela - where a stubborn, dictator-like President Hugo Chavez faces the prospect of another general trike that could bring oil exports to a halt as the one did last December and January. Even in Saudi Arabia, usually a stable oil exporter, the royal government is openly battling Wahhabi militants in the streets; a Wahhabi-Saudi confrontation may herald civil war as this seems to signal an end to a covenant struck 250 years ago between Prince Mohammed Ibn Saud and Shaikh Mohammed Ibn Abdel Wahhab, which has been the primary source of legitimacy for the House of Saud.

Supplies in the US dropped to alarmingly low levels in the last winter as a year of reductions in OPEC output and then a general strike in Venezuela crimped global output and compelled refineries to draw down petroleum stocks. Since then, inventories have not rebounded to comfortable levels, in part because demand for oil, despite the stop-and-start economy, has grown more than expected. Oil traders and consumers thought that exports from Iraq would resume almost immediately after the war and replenish supplies, driving prices lower. Now, more than three months after President George W. Bush declared an end to the war, the Iraqi oil industry is pumping less than half its pre-war output, and exporting oil only sporadically. While the war left the oil sector largely unscathed, post-war looting has decimated the industry, and persistent sabotage of pipelines and other installations has delayed exports.

In Venezuela, exports are slipping, further eroding global oil supplies. In July, Venezuela produced 2.58m b/d. Its OPEC quota is 2.92m b/d. After nationwide strikes early this year, Chavez fired half the work force at the state-owned Petroleos de Venezuela (PDVSA) and then boasted of bringing back oil production. PDVSA kept up exports for a while, but a sharply reduced work force has made it harder to run oilfields and installations. Venezuela's difficult fields need about $4 bn/year in investment just to keep production stable. Without such investment, output could decline by 10-25% a year. Caracas has not made that investment. To maintain a potential of 3m b/d, Venezuela required 80-100 rigs in service. Since the end of 2002 there had been fewer than 40.

Production from Indonesia has been steadily declining. The 10 voting OPEC members have gradually reined in some of their over-production this summer, a move that has also eroded supplies.

In the autumn, bottlenecks might develop in the US refining network and lead to even higher prices. Some refineries will be taken out of service for a few weeks for routine but necessary maintenance. In New York and Connecticut, refiners will begin to add ethanol rather than the additive MTBE to gasoline to reduce emissions. When that kind of change is made, markets are always tight, so that could affect prices as well.

US efforts to boost its Strategic Petroleum Reserve (SPR) have contributed to the surge in world oil prices and risks aggravating the drag on the fragile economic recovery. While Washington faces high oil prices and a growing budget deficit, the government allows oil companies to make shipments to the SPR in lieu of paying royalties for extracting oil and gas on US territory. Senator Carl Levin, a Democrat from Michigan, has urged the administration to suspend the programme until oil prices fell.

(The US consumes about 20m b/d. Senator Levin is talking about 11m barrels over a three-month period. The US was forced to stop filling the SPR from January until March, in large part because of the Venezuelan strike. The US now depends on foreign suppliers for half of its oil).