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French Version

Oil markets head for decisive year in 2006

Analysts are now debating what price level opec will defend

World oil prices, after a 40 percent surge in 2005, may now be set to ease in the face of warmer weather in the U.S. northeast, a trend that could nonetheless be disrupted by OPEC production cuts, analysts said. Prices for New York's main contract, light sweet crude for February delivery, were hovering close to $60 Friday, while in London the price of Brent North Sea crude was around $57.

Crude futures had hit historic highs in late August following the devastation wrought by Hurricane Katrina on U.S. Gulf Coast energy installations, surging to $70.85 per barrel in New York and $68.89 in London.

That marked a 70-percent jump between January and August, but prices have since pulled back owing largely to mild weather across the northern hemisphere in the run-up to winter.

"With the warmer than expected temperatures in the U.S. northeast the demand for heating oil is set to ease," analysts at Sucden brokerage said, adding that milder temperatures could place less pressure on prices.

The northeast region accounts for some 80 percent of total energy demand in the United States.

Despite the recent warming trend in the region, crude prices were headed for a 40 percent gain in 2005 over the previous year, Sucden experts predicted.

But clouding prospects for cheaper oil early in the new year is a recent suggestion by Iranian Oil Minister Kazem Vaziri-Hamaneh's of a production cut by the Organization of Petroleum Exporting Countries.

Speaking of an upcoming OPEC ministerial meeting January 31, Kazem said last week he wanted the oil cartel to cut its output ceiling by one million barrels per day (bpd).

Iran is the second-biggest crude producer within OPEC, where the official output ceiling currently stands at 28 million bpd.

At its last session December 12, the cartel decided not to renew an offer of two million barrels per day in emergency additional output.

"People got a false impression from the last OPEC meeting that they were unconcerned about supplies and price, and now they realize that OPEC is potentially laying out the groundwork for a cut in January," said Phil Flynn, senior market analyst at Alaron Trading. "They won't just let prices fall."

The oil market is now debating what price level OPEC will defend. "It was $30, then $40, then $50 - and now it looks more like $55," he said. The 40-percent rise over the past 12 months did not, as some predicted, upset the world economy, kill off growth and send developed countries into an inflationary spiral.

But it did raise the question of whether oil had become permanently more expensive, highlighting the role of energy conservation and efficiency in public policy, the need for more investment in oil production and refining capacity and alternative sources of energy and materials.

Koen Vincent, a senior economist at the Organization for European Cooperation and Development, believes 2005 might go down as a decisive year. "This is not a blip. This is apparently a permanently higher level of energy prices," he said.

Concern that the rise in oil prices would cause inflation was the dominant economic theme for much of the second half of 2005, and it is likely to continue to figure prominently in 2006 as Central Banks remain on their guard.

The global economy's resistance to inflation in 2005 proved a revelation for many economists, revealing fundamental structural changes witnessed in the last two decades as well as benign shifts in attitudes toward inflation.

"In the past, if we'd have had this type of rise in oil prices, we'd have had weaker growth and higher inflation," said chief economist of Global Insight, Nariman Behravesh.

Another issue, frequently evoked in 2005, was an apparent lack of spare capacity in the global oil production system, which led to fears that demand might outstrip supply.

This was overplayed, according to some analysts and is likely to be less significant in 2006.

"There's no doubt that the system was on the very limit for a lot of the year," said an oil analyst at Global Insight in London, Simon Wardell.

"But even with the hurricanes, there seems to be a little more slack in the system than maybe we thought."

In 2005, nearly everything was to blame for the dramatic rise in oil prices.

The war in Iraq had left instability at the heart of the Middle East, with violence threatening to spill over into neighbouring oil-producing countries.

The Russian Judiciary, backed by the Kremlin, continued an assault on Yukos, disrupting oil supplies from Russia, the world's second-biggest producer.

Iran elected a ultra-nationalist president and continued pressing its right to nuclear weapons and, in Saudi Arabia, King Fahd died, leading traders to bemoan another source of instability.

Oil-importing countries blamed oil-producing countries for failing to invest enough in production capacity, while oil-producing countries said that oil-importing countries had failed to invest enough in refineries.

Speculators were condemned for driving up the price, while consumers in India and China were held responsible for a surge in demand.

Beirut,02January2006
Redaction
The Daily Star


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