SAUDI ARABIA - The Oil Market Perspective.

World crude oil prices will rise sharply in the event of a cold winter in the northern hemisphere. As with its gasoline market in the driving season, the US will be the main factor for world crude oil prices during winter. The second main factor is OPEC's Sept. 24 decision to cut production by 3.5% to 24.5m b/d as from Nov. 1, which immediately caused November WTI futures at NYMEX to jump $1.07 (4.2%) to $28.20/barrel, the biggest increase since Aug. 1.

Already the supply-demand balance for heating oil in the US is in a precarious state as distillate stocks there are near the bottom of their five-year average. The EIA's Short-Term Energy Outlook says heating oil prices "could rise considerably more than is suggested by our base case projections" in the event of cold winter. The last winter in the US was abnormally cold. The EIA says demand for heating oil in the US during the fourth quarter of 2003 and first quarter of 2004 will average 4.1m b/d, up from 4.05m b/d a year earlier.

According to the EIA, heating oil stocks in the US recently amounted to 49.8m barrels, 16.2% below the level in the same part of the year in 2002. Petroleum Argus on Sept. 15 warned of the danger of a re-run of events in mid-September 1999, when heating oil futures were in contango encouraging stock growth. But by mid-November 1999, forward premia eroded to less than monthly storage costs, and by the end of that year January heating oil futures were 1.15 cents per US gallon above February futures - encouraging refiners and distributors to reduce refinery output, curtail imports and even export distillates. When a severe winter storm hit in early February, distributors scrambled to buy spot heating oil, pushing prompt cargoes prices to nearly $1.18/gallon.

On Feb. 7, 2003, heating oil rose to almost $1.20/gallon, driven by soaring crude oil prices and below-average temperatures. The East Coast, which accounts for half of US distillate consumption, had an unusually cold weather in the first half of 2003, which maintained high heating oil demand and kept stocks in check. If temperatures in the north-east stay below normal in the coming winter, heating oil demand will rise even more, as the EIA has indicated.

On the supply side the situation is not encouraging. A rapid increase in Russian oil production will soon stall because of capacity limitations to export outlets. The prospects for unrest in Venezuela and Nigeria look strong and Iraqi exports are not likely to exceed 1.2m b/d in the coming months as they will be limited to two southern terminals. The northern pipeline for Kirkuk crude oil to reach the Ceyhan terminal in Turkey is being sabotage repeatedly. In view of this situation, Saudi Arabia and most other members of OPEC are producing well over their quotas.