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."