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.