OPEC output boost draws mixed reaction in Asia

OPEC output boost draws mixed reaction in Asia

By James T. Areddy and Heather Draper

HONG KONG (Dow Jones): The move by the Organization of
Petroleum Exporting Countries (OPEC) early Wednesday to boost
output to levels of a year ago should push Asia's retail prices
down and provide some relief to regional economies, but the
increase is insufficient to lower prices much, said Asian energy
officials and analysts.

"What this is telling (Asia's oil-importing nations) is that
we're not going back to sub-US$20 a barrel," said Merrill Lynch-
Singapore energy analyst James Brown. "We're moving toward a
higher global price regime."

Generally speaking, higher crude oil prices drag on Asian
economies, with South Korea being one of the biggest losers
because of its high import levels.

Analysts said exporters Indonesia and Malaysia are Asia's net
beneficiaries of higher prices, but are probably reluctant to see
runaway increases.

Brown said the official OPEC quota increase of 1.452 million
barrels a day to a total of 21.069 million b/d starting April 1
will mean the benchmark West Texas Intermediate (WTI) oil futures
price will probably stabilize around $25/bbl.

The OPEC news has had little impact on the crude market thus
far. The front-month May WTI contract traded at 0700 GMT in New
York Mercantile Exchange after-hours trade at $27.17/bbl, up 8
cents from Tuesday.

What concerns Asia most about oil price trends now, analysts
say, is how drastically they will affect the major industrialized
economies, in terms of growth, interest rates, equity prices,
consumer confidence -- and ultimately the demand for Asian
exports.

Those factors will have a more immediate impact on Asian
economies than the inflationary effect of oil prices, which
remain double the level of March 1999.

The OPEC oil production boost announced in Vienna has had
minimal impact on Asia's markets thus far, although traders said
spot crude prices may head a little lower on the news.

The increase was within market expectations of an increase of
1.2 million to 1.7 million b/d, so Asian crude traders said they
don't expect rash or immediate action by buyers or sellers.

"We were expecting this increase, (and) nobody seems to be in
a panic to buy or sell," said one Tokyo-based trader with a
Japanese refiner.

Asian stock markets and currencies were mixed midday on the
news.

Analysts said the move should satisfy demand enough that
prices won't surge toward US$30/barrel again, but it won't erase
the gains made in the past year.

OPEC's increase was somewhat "less than expected," but OPEC
has done enough to keep oil from careening upwards, according to
Song Seng Wun, an economist at G.K. Goh Holdings Ltd. in
Singapore.

"It basically takes away a lot of the uncertainty," said Neil
Saker, director of economic research at SG Securities Research
Ltd. in Singapore. "We aren't likely to see a huge surge."

Asian analysts said they hope the OPEC agreement will prompt
other countries to step up their production as well.

OPEC's second-biggest producer, Iran, objected to the increase
agreement and didn't sign it, while the output of OPEC's No. 4
producer, Iraq, is regulated by the United Nations. However, the
market expects increases from both.

In total, the new agreement implies a target output ceiling of
21.069 million b/d for the nine of 11 OPEC members that signed
it, or 24.6 million b/d if Iran were to resume last year's output
level.

A World Bank study published last week indicated that most
Asian countries should be concerned about high oil prices. The
bank study calculated that South Korea, the Philippines, China
and Thailand would all face a negative current account balance of
more than 10% if crude oil this year averages $23/bbl and global
interest rates rise 1.50 percentage points.

Even Asia's biggest exporter and only OPEC member, Indonesia,
would find itself slightly on the losing side of a $23/bbl
scenario, the study said.

G.K. Goh's Song said "simple mathematics" suggest the oil
price increases that preceded the OPEC agreement will ultimately
lift consumer inflation.

He said there is a "stickiness" in some economies that have
subsidized the price rise from savings generated when prices were
lower.

In Singapore, for example, because of oil prices in the past
year, "generally PPI has been creeping up but on the CPI side it
has a lag of 12-15 months," Song said.

Therefore, last year's doubling and near tripling of oil
prices compared with late 1998, would suggest the inflationary
impact should begin to show up in 2000.

In Asia's fastest-growing economy, South Korea, oil accounts
for 18% of the nation's merchandise imports, and energy officials
there were quick to pan OPEC's decision.

Kim Ho-Chul, director of the petroleum industry division at
the energy ministry, derided the OPEC agreement as less than two-
thirds of what is needed to satisfy global demand.

The chairman of the Petroleum Association of Japan, Keiichiro
Okabe, said the Japanese oil industry welcomed OPEC's decision,
but also said the "magnitude of the increase isn't enough to help
lower global crude oil prices."

Chuang Shih-Ming, chief secretary of Taiwan's Energy
Commission, similarly complained "this increase is not enough
considering the world's supply and demand situation."

The good news, according to analysts, is that oil price
increases came in the wake of Asia deflation that persisted
through 1999.

But the Philippines -- a heavy oil-importer -- is experiencing
inflation and has difficulty passing higher oil prices on to
consumers, even under a deregulated downstream market.

Especially now with its credibility crumbling, the Philippine
government has been very hard-pressed to let oil companies lift
retail prices, according to analysts.

Despite that, Philippine Energy Secretary Mario Tiaoqui told
Dow Jones Newswires Wednesday that the OPEC news was a "positive
development" and that he is looking at Dubai crude at about $23-
$24/bbl in the near term.

India's oil ministry also welcomed the OPEC decision, saying
the move will lead to a downward price correction to about $23-
$24 for Brent blend crude. The May Brent crude contract closed
Tuesday at $25.51/bbl.

OPEC's decision will also have a big effect on Thailand, which
buys about 70%-80% of its daily 600,000 b/d in crude requirements
from the Persian Gulf.

According to Surong Bulakul, senior vice president of the
Petroleum Authority of Thailand, "the increase isn't sufficient
to promote price stability in the region."