QATAR - The Global Oil Perspective.

With front-month WTI in Asia hitting a new $68/b record on Aug. 25, the US Energy Department's EIA on the previous day said failure of oil prices to fall despite an unusual build in crude oil inventories was bad news for consumers, pointing to the resilience of the oil markets. But the fuller stocks could pay off this winter, by keeping prices from rising as high as they otherwise would, the EIA said in its weekly comment on oil markets. It added: "Moreover, refiners will be able to draw from crude oil inventories that are currently well above the average range should there be a need to produce extra heating oil this upcoming winter. Thus, while crude oil prices are high now, the recent counter-seasonal build in crude oil inventories should keep prices from being as high this coming winter as they might be without this extra crude oil inventory".

US commercial inventories of crude oil had built by nearly 5m barrels in the previous three weeks, a time of year when they typically should have contracted. However, the EIA said: "The bad news is that crude oil prices remain very high, despite growing inventories. If prices don't fall under these conditions, what will make them fall?" The builds were the result in part of refineries having more operating problems during the period than usual, which had kept them from processing the crude. Those disruptions, however, could prove temporary, leaving healthy refiners with a bigger than usual cushion of crude oil to draw from.

Citigroup, Goldman Sachs (GS) and Merrill Lynch all say oil prices will stay higher for longer. But despite such pronouncements, there is the worry that, sooner or later, oil prices will fall. The uncertainty lies with figuring out when and how far - with ten tropical storms forecast until end-November. A key point in GS findings is that high prices are discouraging investment as oil companies are afraid prices will fall.

The world's economic expansion is intact but continuing high oil prices pose a risk. Speaking to reporters in Singapore via a video-conference on Aug. 25, IMF Managing Director Rodrigo de Rato said: "We expect that oil prices will not recede in the medium term...not even to [the level of] 2004. High oil prices are a risk".

De Rato said oil prices were likely to stay high, driven by high demand not only from China and India but also increased consumption in the US. He said the main reasons for rising oil prices in the last two years had been demand-driven, although he said inefficiencies in the supply of oil products by state-run oil firms and refinery bottlenecks added upward pressure. He said there was a "high degree of speculation" in the oil markets, but even if that were absent "demand forces and supply constraints" will keep prices high in the medium term.

Nevertheless, Asian economies are expected to see continued strong growth in 2005 and 2006. But de Rato said he would not like to predict a number before the IMF's annual meeting. "The growth in Asia in 2004 was very good [at] 6.75% and we see the continuation of a similar track in the next two years", he said. He forecast that economic growth will be driven by China's rapid expansion while Japan is also gaining momentum. He added: "There are visible signs the deflationary pressure is receding" in Japan. But he warned the impact of oil prices is modest at this moment and "we believe if high oil prices will continue, Asian growth will be affected".

De Rato advised governments in Asia to ensure their budgetary policies cut deficits, and to make consumers and companies aware that high oil prices were here to stay. The inability of some Asian economies to tackle the oil shock "is causing strains in low-income countries and the IMF is ready to support these countries". De Rato said Asian central banks should be vigilant in their monetary policy to curb the inflationary threat of high oil prices. He cited Indonesia and the Philippines as examples.

In Indonesia, oil prices have pulled the local currency to a 41-month low and have slowed economic growth. De Rato said Indonesian economic fundamentals were sound and growth remained strong, but what the government needed to address through monetary and fiscal policies was some of the consequences of high oil prices. "We have been advising the Indonesian authorities to address those through monetary policy to reduce inflationary pressures which will sustain a strong currency, a stable currency", he said. At the same time, the budget should address the gap between revenue and spending as "high expenditures and subsidies are not in the interest of Indonesia", he said. Indonesia's fuel subsidies - which totalled US$7.4 bn in 2004, or 3% of GDP - are "very high". He said the Indonesian authorities had been raising interest rates, but they needed to understand a tighter monetary policy should aim at reducing liquidity, which will help the Indonesian currency. In addition, domestic oil pricing in Indonesia should be made more "realistic and transparent", he said.

De Rato welcomed moves by China and Malaysia to adopt more flexible exchange rates, saying: "It is a good and welcome move for the good of Malaysia and China. This will allow both of them to have more sophisticated systems to absorb external shocks". The IMF understands these reforms are gradual, but they should also be credible, with market forces playing a bigger part in determining exchange rates.

De Rato said global imbalances were caused by several factors, including lack of growth in Europe and slow growth in Japan. In addition, the US needs to address its current account deficit, he said. He said Japan's economy was recovering, with emphasis on domestic consumption as well as exports. However, he warned that China's fast pace of growth was "too much to be sustained over time".