The Hindu Business Line : Global crude oil prices may stay high

GLOBAL crude oil prices are forecast to remain high in the short term on low stocks and the Organisation of Petroleum Exporting Countries (OPEC) decision to cut supply.

But succour may be at hand from non-OPEC nations raising their production and Iraq pumping out more exports. "OPEC's decision to cut its production quota by four per cent in February is likely to keep oil prices relatively high. However, an expected fall in seasonal demand in mid-2004, forecast by the International Energy Agency to be around 4.3 million barrels a day, and increasing non-OPEC production are likely to lead to a gradual decline in the prices," says an Australian Bureau of Agricultural and Resources Economics (Abare) report.

For 2004 as a whole, oil prices are forecast to average around $27 a barrel in world trade weighted price terms. By 2005, oil prices are expected to average 12 per cent lower at $24.

"This fall in oil prices reflects an expected increase in production from non-OPEC countries together with an assumed gradual increase in Iraq's oil exports," Abare said.

Abare has made the forecast based on a number of assumptions, including a continuation of steady increase in global consumption over the period, OPEC maintaining its target price range and slower growth in non-OPEC oil production.

Global consumption, the report says, is likely to increase by 1.5 per cent to 79.6 million barrels a day this year. Much of the growth may come from increased consumption in non-OECD countries, such as India and China. Non-OECD oil consumption is forecast to grow by three per cent to 30.9 million barrels a day this year. In comparison, growth in the OECD region is expected to be less than one per cent.

Global oil consumption is projected to grow at an average rate of two per cent a year to almost 89 million barrels a day by 2009. "Continued strong growth in non-OECD consumption is projected over this period, with growth in oil consumption averaging slightly more than three per cent a year," the report has said.

While China is expected to be the main driver of growth in global oil consumption, with the offtake forecast to rise six per cent this year, the US' consumption is seen rising by over one per cent from the present 20 million barrels a day.

Non-OPEC oil producers, who had increased production last year to 49 million barrels a day as prices flared up, are expected to increase production by another 1.5 million barrels a day. Given this forecast, non-OPEC oil producers could increase their share of global oil production to around 63 per cent, Abare says.

Among the non-OPEC oil producers, Russia is expected to lead the output charge. Its production is seen rising seven per cent this year to 9.1 million barrels a day. Africa, the US, Canada and Brazil are the others expected to increase their production.

However, Abare is of the view that output from mature oilfields in Russia, North America and the North Sea could decline. Stating that Iraq has large reserves, Abare says there is considerable uncertainly surrounding the outlook for oil production in Iraq in the medium term. Quoting the International Energy Agency, it says Iraq could take up to six years to achieve a production capacity of 3.7 million barrels.

Abare says given the reliance of world economy on OPEC oil, the cartel's collective decision on production will continue to be a dominant factor in influencing world prices. "It is expected that OPEC will continue to adjust flexibly its production to changing market conditions in order to main oil prices within target range," it said.

OPEC has targeted a price of $25 a barrel. However, the prices are well above the range with the prices currently ruling at $32.50 a barrel for April settlement.

"The risk of this strategy (OPEC's) is that prolonged periods of high oil prices will impair business and consumer confidence, inhibiting global economic growth," Abare said.