RUSSIA - The Market Perspective.

World oil prices are expected to be high in the near future, in reverse of the trend in 1998, with demand in the US, Europe and some markets east of Suez continuing to the strong. Crude oil prices began to rise again from late July as the market became convinced that Saudi Arabia and other exporters were not increasing production significantly before OPEC's Sept. 10 ministerial conference.

However, OPEC's conference would have to come up with a major increase in production to prevent oil prices from triggering inflation and causing a global recession. This danger will be high in the event of a severe winter cold in the Northern Hemisphere and if heating oil stocks remain low. A global recession could cause world oil demand to fall by 2.5-5.5m b/d, depending on the depth of the crisis, and this could occur in March 2001 if oil prices in winter shoot up. The US oil market will be the focal point to watch and OPEC now depends on the American economy.

Data released on Aug. 11 by the US Labour Department showed that inflation at the American producer level, after a huge jump in June caused by soaring energy costs, disappeared in July as prices were unchanged. The producer price index, measuring inflation pressures before they reach the consumer, was flat after a hefty 0.6% rise in June. At the same time, the Commerce Department said US retail sales rose by a stronger-than-expected 0.7% in July, propelled by sharp gains in purchases of autos and other big-ticket items. This showed an ability and willingness of US consumers to support the economy. The "core rate" of inflation was up just 0.1%, after having fallen 0.1% in June. The Dow Junes industrial average crossed 11,000 for the first time since April as investors saw the data as good news for blue-chip stocks. But the good news could be over as US oil prices in August are likely to reach the June record of $31.74/barrel for spot WTI, judging by the high levels attained so far this month.

In the US the situation will be influenced by the following: oil stocks have fallen to their lowest levels in 24 years; the question whether US refining profit margins over the next few months would encourage refineries to maintain output high enough to meet winter heating oil demand; because of low natural gas stocks, gas spot prices have reached $4/000 CF and could rise to $6 in winter; 22,000MW of nuclear capacity is to be closed down due to routine maintenance in September, so gas that might have been used to fill storage facilities may instead be diverted to generate power; the hurricane season, from mid-August to end-October, is entering its most active phase, with any storm entering the Gulf of Mexico likely to force the closure of offshore oil and gas production platforms, disrupt the unloading of oil imports or disrupt refining capacity. For the first time in decades, noted 'The Financial Times' on Aug. 14, in the US "the phrase 'energy crisis' is being bandied about".

The spot price of Russia's main export blend of sour crudes Urals is influenced by the prices of Dated Brent and spot Dubai. Dated Brent, a light/sweet crude whose price acts as a marker for most crudes in spot trading, is influenced by WTI - a light/sweet marker which does not trade outside the US.

                   Spot Price Differentials
                        (US$/Barrel)

              D. Brent   Dubai   Urals NWE  Urals Med
     3Q 97     18.52     17.67     17.96     17.77
     4Q 97     18.79     18.05     18.37     18.54
     1Q 98     14.13     12.49     13.66     13.26
     2Q 98     13.34     12.32     12.17     11.85
     3Q 98     12.51     12.53     11.94     11.92
     4Q 98     11.15     11.53     10.57     10.40
     1Q 99     11.26     11.04     11.01     10.65
     2Q 99     15.46     15.28     14.64     14.37
     3Q 99     20.64     19.80     20.18     20.09
     4Q 99     24.01     22.66     23.62     23.67
     1Q 00     26.91     24.40     26.24     26.12
     2Q 00     26.95     25.21     25.89     25.24
   July 00     28.50     25.98     25.60     24.57