OPEC & Crude Oil Buyers Are In A New Phase; Speculators' Premium Gets More Volatile.

*** The Call On OPEC Oil By 2030 Could Be Much Lower Than IEA's Forecast As The Shift To Alternative Sources Of Energy In Most Consuming Areas Will Become Irreversible

*** Saudi Aramco Is To Expand Its Oil Production Capacity To 12.5M B/D By 2009 In Fast Track Projects Which Are Mostly Contracted To Major Players

*** Gazprom Warns Of A Major Fuel Crisis In Russia This Winter & In The Coming Years, Unless The Govt. Raises Domestic N. Gas Prices To A Level That Would Justify Massive Investment In Remove Arctic And E. Siberian Super-Giants

OPEC and the oil market have entered a totally new phase with no simple reason for the recent drop in crude oil prices. It is the phase of the speculators in oil futures, whose premium over the real price of physical crude oil has become far more volatile than at any time before. Over the past summer, refineries in the US built up substantial stocks of crude oil and fuels, which eased supply and has raised the stocks for the winter. There have been no supply disruptions in recent months. The hurricane season is drawing to a close with no major damage. Lower oil demand in the US is a concern but is not causing alarm. The following is a review of what makes OPEC's 11 member-states nervous:

After a good run for the past three years, there is concern the US economy is slowing down. If this becomes global, world oil demand will tail off. The oil futures market looks three to six years ahead, and signs from NYMEX still seem to be reassuring.

Yet such signals can change swiftly as the futures market is in a type of contango which may eventually wipe out the premium above the real value of physical West Texas Intermediate (WTI), an American light/sweet crude oil which does not trade outside the US but on which world energy valuations depend.

OPEC will have to act decisively before April, even if the winter cold has been more severe than expected, as that is when refinery runs will slow down and demand will drop off.

Around mid-August, just before gasoline prices started falling, the Goldman Sachs Commodity Index decided to switch the percentage representation of gasoline in that mix. They replaced gasoline with a higher share for of crude oil. There was a lot of selling pressure on gasoline contracts on NYMEX. One would have thought the fundamentals were responsible for that, but the coincidence was hard to ignore. Gasoline prices just before the announcement was made were around $2.50/gallon. The US working week at NYMEX ended on Oct. 27 with November gasoline closing at $1.559/gallon. January 2007 gasoline closed at $1.5841/g.

Political tensions are easing despite the terrorism alert at Ras Tanura on Oct. 27. The Iranian situation is on the backburner ahead of the Nov. 7 US mid-term Congressional elections. But countervailing factors have to be borne in mind; the problems in Iran and Nigeria are there.

These developments may not bear too much on the medium-term outlook. At different junctures in the recent past, various OPEC ministers have said they see a "fair price" for crude oil of $55 to $65/b.

Speculators play a major role in the settling of the oil price environment. Hedge funds may influence OPEC to cut output again on Dec. 14, when its oil ministers meet in Nigeria. At their emergency meeting in Doha, Qatar, on Oct. 19-20, they decided to cut 1.2m b/d from their output from Nov. 1.

The need for gasoline next summer could again provide a mechanism for tightening the market unless stocks are built up early. But there are two medium-term structural issues of which to take account, running deeper than the short-term influences. Renewed tightness of supply is one such factor.

The global oil stock has risen from 70 days' worth of forward consumption in the first quarter of 2005 to over 74 days in the third quarter of 2006 - a level where the markets felt considerably at ease. Higher market prices over the last few quarters were starting to impact demand growth in the US and elsewhere in the world. So far world crude oil consumption has been rising year on year at 0.8% versus 1.7% over the equivalent three quarters last year. Demand growth has slowed sharply in all areas except China.

Even sales of gasoline and diesel, for which there is no substitute, have risen by a mere 0.1% this year in the OECD, while consumption of naphtha and heating oils is down sharply as cheaper natural gas and coal make inroads into market. Incremental oil consumption in the US market has languished at a mere 120,000 b/d during the first nine months of 2006.

The IEA trimmed its 2007 global oil demand growth forecast by 90,000 b/d to 1.45m b/d because of the weakening demand in the US market. This followed a downward revision of 100,000 b/d last month. US distillate output is reported at a new high and refiners are cutting runs. Crude runs in Asia in July and August were 700,000 b/d higher than the same period in 2005 and US throughputs in September averaged 15.8m b/d - a record for that month. The surge in refinery output far outstripped consumer demand and product stocks have built rapidly in all regions.

A consequent 25m barrel stock build-up in September took US inventories to an eight-year high of 760m barrels. Major Asian destinations have faced product surpluses as local demand failed to absorb higher refinery output over the summer resulting in slashing of crude runs in Japan and other Asian markets. Europe and China represented bright spots in otherwise gloomy market conditions. Counter-balancing strength, however, the Atlantic Basin crude oil demand was slackening again, threatening further price falls. In the first half of 2007, OPEC will see its spare output capacity exceeding 3m b/d.

The second factor is the prospect of a developing global surplus owing to non-OPEC sources. With higher non-OPEC production beginning to come on stream following the sustained period of high prices, the supply-demand balance can get complicated.

The dividend resulting from a low crude oil price is worldwide but comes at a sensitive time for the US. By easing costs for heating homes, commuting, and running factories, lower US energy prices reduce worries about a possible recession for the world's biggest economy. Lower energy prices also promise to help fight inflation.

According to a report on Oct. 17 US gasoline prices posted a record one-month plunge of 22.2%. And on Oct. 18, thanks in part to fuel costs, the US Labour Department announced its broad index of consumer prices fell 0.5% in September. "The lower energy prices certainly help", says John Silvia, chief economist at Wachovia in Charlotte, North Carolina. This does not assure a soft landing for the US economy, but it is enhancing the chances.

Crude oil still costs twice what it did in 2003, but the change over the past two months is significant. Motorists could soon be pumping gasoline at less than $1.8/gallon, down from summer highs above $3. Cheaper natural gas in the US will keep heating bills lower in winter.

Over the past two months price shifts in gasoline and natural gas have put some $90 billion, annualised, back in US consumers' pockets, according to research by economist Andrew Tilton at the investment firm Goldman Sachs. That was sizable even in a $13 tn economy. By some estimates, the amount more than offsets the hit homeowners are taking from an upward jump in adjustable mortgage rates.

Several factors explain the softening of energy prices, from the end of the summer driving season to fewer hurricanes, which could affect drilling platforms in the Gulf of Mexico.

The biggest factor, however, is cooling demand for fossil fuels. That reflects conservation by consumers, but it stems from a slowing economy - the very problem that lower energy costs are now helping to alleviate. Demand continues to grow but at a very low rate.

America's output of goods and services, after expanding faster than 3% annually in 2004 and 2005, slipped to a 2.6% annualised rate in the second quarter. Third-quarter numbers are to be slower still. Even as Chinese energy demand continues to soar, forecasters have pared back their outlook for the US, the world's biggest oil consumer.

Conservation plays a role. US consumption of gasoline typically grows by more than 1% a year. This year's growth will be less than 1%, not keeping pace with a population which surpassed the 300m milestone recently. This represents a natural response to higher-priced oil in 2004/05. It prods consumers to use less and gives suppliers an incentive to expand production. All this has changed the mood of those who trade oil contracts on commodity futures markets.

Front-month WTI has fallen from $78.40/b on July 14 to less than $60 in recent weeks, with front-month Brent having peaked at $78.64 in August. Prices could still spike if supplies are disrupted in places like the Middle East or Nigeria.

OPEC's 11 member-states are not unanimous in their outlook, but backers of a production cut do not want to let prices fall too far. It should not be surprising if US retail gasoline prices fell below $1.8/gallon as refiners shift to cheaper winter products. Economists at Wachovia believe WTI will remain around $60/b early next year. All this comes as the US economy is in a phase of adjustment. On Oct. 27, December WTI closed at $60.75, with January WTI at $62.53, January 2008 WTI at $68.45, January 2009 WTI at $68.76, January 2010 WTI at $67.58, January 2011 WTI at $66.24 and December 2012 WTI at $63.88.

The Federal Reserve has raised interest rates incrementally since mid-2004 but is now sitting on the sidelines as the economy cools. But soft landings are not easy to achieve. The risk of recession has risen along with tighter monetary policy. To some falling oil prices could be a symptom of that risk. Merrill Lynch's David Rosenberg, in a recent report, notes oil prices fell 25% in the six months before the recession in 2001. The price cut did not prevent that recession, as "the decline in crude [oil] was symptomatic of slower demand" in the economy.

Today a US housing market driven by low interest rates has weakened. US employers created a tepid 51,000 jobs in September. Still, others believe the US economy remains on solid footing and are for moderate growth, with the question of recession hinging on the housing market. For now lower energy prices are giving an important boost to consumers.