Asia, Gulf oil traders expect volatile 2003

Asia, Gulf oil traders expect volatile 2003

Nurul Darni, Dow Jones, Singapore

Crude oil traders in Asia are looking ahead to 2003 with some apprehension, as they expect it to be a particularly volatile year for crude oil markets, even though this will generate interesting trading possibilities for them.

At the forefront of their attention is how the international drama over Iraq, UN weapons inspectors and U.S. threats will play out. Another critical factor is continuing high tensions in the Mid-East and Islamic countries elsewhere, which are being stoked up by the Israel-Palestine crisis.

And further confusing the picture is uncertainty about OPEC output levels, and whether the group will succeed in reining-in rampant overproduction and restore some credibility to its quota system.

Some analysts argue that any U.S. attack on Iraq will be a much more confined affair than the war provoked by Iraq's 1990 invasion of Kuwait. They suggest any resulting oil price spike will be much smaller and also short-lived than that seen during the Gulf war.

"After decades of war either with Iran or with U.S.-led forces in 1991 and with the U.N. sanctions, Iraq is in a weak position. In our view, the most recent experience of most U.S.-led conflicts is that they are relatively short-lived," said David Thurtell, commodity strategist with Australia-based Commonwealth Research.

However, what isn't clear is the subsequent regional political ramifications of such an attack, the scale of any oil supply disruption and just how markets will react to these unpredictable events.

In Asia, buyers have been lining up alternative crude oil sources for months, partially to offset supply shortfalls in the event of disruption to Iraqi oil output and Gulf shipping.

Ironically, the tensions generated by the Iraq crisis has led to a greater availability of crude oil. The crude oil price "war premium" of around US$3-4/bbl has been instrumental in boosting both OPEC and non-OPEC oil output, a Singapore-based crude operations manager noted.

A market-dampening factor has been the International Energy Agency. The Paris-based organization has said it will coordinate at short notice the release into world markets of large volumes of oil from stocks held by member countries if OPEC members are unable to make good any supply shortfall.

"From public, or government stocks, we could release as much as 12 million barrels a day in the first month," IEA executive director Robert Priddle said.

This is nearly five times as much oil as the 2.45 million b/d Iraq produced in October and exceeds the current output of Saudi Arabia, Kuwait and the United Arab Emirates.

Despite maintaining their official 21.701 million b/d output target from the beginning of 2002, output by OPEC has steadily crept up.

In October, according to an average of figures from secondary sources, OPEC's over-quota output hit 2.82 million b/d.

Some industry watchers believe that unless OPEC starts cutting the amount of oil it supplies to the market by early 2003, inventory levels could swell to such a level that there could be a price collapse in second quarter of the year.

Possibly adding to bloated inventories could be a change of regime in Iraq, or calming of the crisis there, either of which could result in higher Iraqi oil exports.

Add to that the steady rise in Russian and other non-OPEC oil output, and a faltering world economy unable to absorb all the oil washing around, and you have a bearish price outlook.

"The oil price should be hovering at the low end of OPEC's $22-$28 barrels price range by mid-2003," a Hong-Kong based oil analyst said.

With Asian regional crude oil output unable to meet local, along with the introduction of higher environmental standards and buyers finding ways to cut dependency on high-sulfur Mideast crudes, the flow of non-traditional sweet grades to Asia will continue to rise in the medium to long-term.

Asian refiners will continue to suck in more sweet grades, especially from non-traditional source West Africa, so long as crude price differentials make it economically feasible, crude traders say.

And long-term outlook for Asian oil demand and supply is for an increasing imbalance.

According to the Energy Information Agency, Asia's crude oil imports are likely to increase from 11.8 million b/d seen in 1995 to 20.1 million b/d in 2020.

And while the Middle East will continue to be the largest supplier to Asia for the foreseeable future, crude flows from Africa, and from oilfields within the Asia region, are likely to continue rising, analysts say.

On average, Asia is now importing slightly more than 1 million b/d of African sweet crudes, up from about 300,000 b/d in 1995.

"In Asia, various countries are talking about implementing clean fuels and lower sulfur fuels. People are going to have to clean up gasoline, and West African sweet crudes fit into that mould," a Singapore-based oil consultant said.

As Asia's demand further outpaces Asian low-sulfur crude output, refiners in the region will feel growing pressure to find more non-Asian sweet crudes, with the most likely sources being West Africa and the North Sea.

Asia accounts for only 6% of total global crude output of about 67 million b/d, according to the Hawaii-based research organization East-West Center.

However, Asia's crude demand of about 17 million b/d is 2 million b/d higher than U.S. demand and nearly three times that of Latin America.