TURKEY - The Global Oil Perspective.

June WTI on April 21 rose $1.48 to $75.17/b and June Brent gained $1.39 at $74.57. WTI rallied about $14 this year on supply concerns and as more funds pour into oil futures and other commodities. High prices are yet to halt oil demand growth in the US or in fast-growing China and India.

Ministers from 65 states and oil firms' CEOs meeting in Doha on April 22-24, agreed current prices were too high but split over what is a fair level. Among other things, it depends on the escalating costs of extracting reserves, the value of the US dollar, and above all on how high a level the world can stand before recession hits and demand for fuel collapses. "$60 did not bring a recession... It's dampening oil demand growth and having a positive effect on the environment", said Nordine Ait-Laoussine, former Algerian energy minister.

Ait-Laoussine added: "On the supply side, it's stimulating the growth of global output capacity, both in conventional and non-conventional supplies. As a result, it provides a security against future energy crises". Oil prices have more than trebled since the start of 2002.

Adding fuel to fire, Iran's hardline President Mahmoud Ahmadi-Nejad on April 19 said: "The global [crude] oil price has not reached its real value yet. The products derived from crude oil are sold at prices dozens of times higher than those charged by oil producing countries". He said developed countries were the ones gaining the most from high crude oil prices.

Ahmadi-Nejad on April 21 said only rich countries should pay the "real price" of crude oil and poorer nations should get it cheaper. The idea is along the pricing scheme used in Iranian state-run hotels, where foreign tourists pay many times more than local guests. His anti-US and anti-Israel pronouncements have been particularly provocative (see news17-ArabIPOsReformsIranApr24-06).

The US Federal Reserve has suggested it may be nearing an end to its rate-tightening cycle, giving traders one more reason to buy oil futures, precious metals and other commodities. Aluminium hit a 17-1/2-year peak. An LME trader was on April 20 quoted as saying: "I have never seen anything like this, more and more people are piling in. People did not know what commodities were a year ago".

Before going further into market fundamentals, however, it is important to note that the price of WTI in 1980 was higher than $85/b if calculated after excluding inflation and in today's dollars. According to Barclays Capital, in November 1979 WTI surged to $87.23/b in today's money. So oil prices still can go up and the GCC boom could last for years (see news17ArabIPOsReformsIranApr24-06).

In its monthly oil market report, OPEC on April 18 warned that "sustained higher energy prices may pose a risk to growth" as it reported world oil demand rising by almost 1m b/d in 2005. "With full preliminary figures available for the first time for the whole of 2005, global oil demand appears to have grown by...1.2% to average 83.1m b/d during 2005". It warned of supply shortages of gasoline for the coming warm months in the northern hemisphere which could "provide some support for crude [oil] prices". It also warned: "Sustained higher energy prices may pose a risk to [world economic] growth, especially in economies where consumer budgets face pressure from rising interest rates". It said the US economy would "slow later in 2006 and the world economy will become more dependent upon demand generated in Asia and Europe... Prospects for Europe are uncertain [as] political uncertainty may inhibit much needed labor market restructuring, keeping unemployment at high levels and reinforcing the reluctance of households to spend".

OPEC said world oil demand in 2006 would grow 1.4m b/d, 1.7%, to 84.5m b/d, "marginally lower with respect to the growth estimate" in March. This was due "to the disappointing consumption in the USA over the first three months of 2006 partially offset by an above trend growth in Western Europe, especially in January". And "China's apparent demand for the first quarter of 2006, preliminary trade and production figures point to a...volatile consumption with demand appearing to have surged by around 20% in January but only increased by 3% in February".

OPEC communications director Omar Farouk Ibrahim told AFP: "The key thing is that these developments are not the result of a lack of oil on the market. If the market was not well-supplied then maybe the need for OPEC to pump more [oil] immediately to calm the markets would arise".

The most important factor behind high oil prices is speculation. By one estimate, some $125 bn have flowed into commodity index funds often heavily invested in energy. Oil is a commodity whose price depends on supply and demand. Viewed from that perspective, oil prices may be near their top - at least for now. But in a few months one must not be surprised if this has become the year of WTI's $105/b "Super-Spike" which Goldman Sachs had predicted in late March 2005.

All the bad news one can think of are in the oil futures markets. OPEC members have offered extra deliveries but have been turned down - i.e., plenty of crude available. This quarter is usually the low point in demand for crude. Refineries are busy conducting maintenance or shifting over to the summer blends of gasoline.

The second most important factor is the 18 or so markets for reformulated gasolines (RFGs) in the US. The current run-up in gasoline price is more related to stresses in the phasing out of MTBE, a fuel additive. It is being replaced by ethanol, which is in short supply. Once the refineries come back on stream, they should take some of the pressure off in the US.

Speculators play a role in short-term price swings. Almost everyday it seems some pension fund is dedicating a portion of its assets to a commodity index. Energy dominates. As the investment pool grows, the financial institutions running them buy futures contracts. It causes more participation, it helps to push up prices.

A clearer view of these market participants has emerged, as some commodity exchanges have conducted studies of them. John Felmy, chief economist at API, says: "They don't seem to be driving the market but following it. But they can have a transitory impact - the question is for how long".

Earlier in April, the EIA forecast peak gasoline prices in the mid-$2.70/g level for the summer. Those levels have already been reached. The national US average last week was $2.80/g. Based on the current price of crude oil, Neil Gamson, an analyst at EIA, estimates the price of regular unleaded could "easily" rise to $2.87/g. "There is some momentum to continue to rise over the next few weeks, but it might ease a little bit in the later half of the spring as the refining situation sorts itself out".

On April 18, the US Labour Department reported the wholesale price of gasoline had risen 9.1% in March. That had helped push the Producer Price Index up 0.5% in the month. Sometimes such spikes get passed on in the form of surcharges or additional fees. The Christian Science Monitor on April 19 focused on one consumer, "Robert Hill", who on April 18 was filling up at a Shell station in Boston under a sign which posted "$2.69 9/10" for regular gasoline. The Monitor quoted Hill, a "retired disabled Vietnam veteran", as saying: "I just feel like it's unnecessary for the public to pay this amount of money. I don't think we should be fighting this war [now in Iraq, or perhaps soon against Iran]. You're losing in two ways: the young men and women over there and at the pump" in USA.

The effects of the war on the US were compounded by rising energy demand from China and India. The Monitor quoted another motorist, named "Dr. Prasad", as saying: "Obviously I think it's expensive. It's exorbitant". The paper said he was filling up his Mercedes SUV. He added: "I'm kind of worried about the summer, to be honest, because I think the prices are going to escalate". Prasad acknowledged, however, that larger vehicles like his may be part of the problem. He said: "This car is four years old, so we didn't know how high the prices would be back then. The next car we bought was a hybrid".

Then the Monitor focused on another US motorist: "School administrator Vince McKay of Newton, Mass., [who] was filling his late-model Saab at the same station". He said he had visited China a year and a half ago as part of an educational group, adding: "I saw first hand the worldwide demand. Why should we be surprised? This country has got to get serious about conservation and we've got to do it now". But for McKay, the Monitor said, getting "serious" about conservation may mean tough measures. It quoted Mr McKay as concluding: "Personally, I think the government should buy up all the SUVs and crush them".

Dubai Sour Crude Futures: Oman and the Dubai Mercantile Exchange (DME) on April 18 announced they will jointly launch a sour crude oil futures contract in the fourth quarter of 2006. Oman's willingness to support the electronic DME - a JV between Dubai Holding unit Tatweer and NYMEX - could help reshape the way Asian refiners and traders price their crudes. While the Middle East is the world's largest hydrocarbon region, it has yet to develop a transparent futures contract. The two leading crude oil futures markers, WTI and Brent, reflect the value of sweet crudes and therefore do not represent Middle East sour grades.

The statement said collaboration between Oman and the DME acknowledged the need for a liquid price discovery mechanism for Middle East crude. Oman's Under-secretary of Oil and Gas Nasser bin Khamis al-Jashmi said: "The creation of a successful, physically linked Middle East sour crude oil futures contract is a concept we sincerely support, given our role in the pricing of Middle Eastern crude. ...[W]e believe the timing is opportune to lead this initiative".

Since signing an MoU in February, the two parties have undertaken an intensive analysis of the benefits and implications of developing an Oman-backed physical crude oil futures contract. Under the terms of the MoU, a working group is to identify the elements necessary for creating a successful, physically linked Middle East sour crude oil futures contract.

The group, consisting of top officials, reported its findings to the joint steering committee comprising senior leadership from both the Ministry of Oil and Gas (MOG) and the DME. The panel unanimously approved the group's findings and instructed it to engage the energy and financial communities on the specific terms of the draft futures contract in preparation for launch in the fourth quarter of 2006. DME's CEO Gary King said: "This initiative will open alternative investment channels for the development of its energy and capital markets. The new electronic exchange will provide the means to manage price and credit risk transparently".

The Financial Times on April 18 quoted King as saying: "Without the backing of an oil producer, it would have been very difficult to launch a contract. This means...the physical price of [crude] oil and the paper price will converge". The move has the potential to usher in a new era of price setting in Middle East sour crude, which has a higher sulphur content than Brent and WTI.

The price could be based on a regional benchmark set on the DME, rather than worked out as a discount to the light/sweet crude oil futures contracts traded in London and New York.

Dubai Holding is owned by Dubai ruler Shaikh Muhammad bin Rashid al-Maktoum, who is the UAE vice-president and prime minister. The setting up of the DME is another leg in Dubai's strategy to become a financial centre.