RIYADH, Jan 27: Oil prices have stayed volatile for the last few weeks. They have soared despite OPEC’s pledge to boost oil output by 1.5 million barrels per day. It has been in

this volatile state despite assurances by Saudi Arabia, the key player within the OPEC, that the group has all the additional reserves capacity, resources, will and determination to meet any global emergency requirement.

The question for immediate concern for most of the economies of the world is to see the impact of the possible war against Iraq on the oil supplies from this part of the world and prices. For a country like Pakistan, still labouring to get out of recession, this could be a crucial phase in many senses. According to the monthly report of the London based Centre for Global Energy Studies established by the former Saudi oil Minister Shaikh Zaki Yamani, the global oil prices in the recent weeks have been driven by four fundamentals. A lack of adequate commercial oil stocks in the United States and no nearby replacement for lost short-haul crude from Venezuela has left the oil supply chain stretched to almost breaking point.

Add to that increased buying by Asian refiners and the continuing fear of a war related supply disruption in Iraq, and it is easy to see why oil prices have surged above $30 a barrel in recent weeks.

Some energy market analysts strongly believe that once the supply to the US market by Venezuela was disrupted, in order to stem the rise of oil prices, the US should have released some 40 million barrels of oil from its Strategic Petroleum Reserve (SPR) in December to tide refiners over until the replacement from the Middle East arrives in due course. This would have calmed market fears and prices in the meantime.

However, the CGES report says the US Administration has been so focussed on Iraq that it failed to act in time.

Despite expectations that the oil market volatility may continue for some more weeks, yet the current bullish run on oil prices does not seem to be lasting long. The US crude runs are expected to begin to fall in February, easing the pressure on stocks. Around this time the increased production from the OPEC states would also start reaching the markets. And when the Venezuelan oil industry returns to normal, as it will ultimately, CGES feels that the world could also be faced with too much oil in the market.

However, even with market fundamentals strong in the near future the uncertainty over war against Iraq would continue to impact and influence the oil market and that is something beyond the control of the OPEC and its member states. Many here in Dhahran, the virtual global energy capital strongly feel that OPEC cannot be blamed for something which is beyond its control and that it is not the market fundamentals that are pushing the oil prices rather it is the American rhetoric responsible for the bullish trend in the global oil markets. One indeed cannot deny the argument altogether.

The CGES points out that if an attack launched on Iraq, consuming country governments would have to utilise quickly their abundant strategic oil stocks to ensure adequate supplies. OPEC’s spare capacity is predominantly located in the Middle East, far from the big oil consuming regions where it is needed. It is also reliant on a small number of tankers, most of which would have to pass through the Strait of Hormuz to carry these additional supplies to market. In such circumstances it is little wonder that buyers are prepared to pay a large premium for oil delivered into their tanks now.

The CGES feels that if attack launched against Saddam Hussein in March, just as Venezuela oil production begins to recover, cutting Iraq’s oil exports and restricting total OPEC output to

somewhat less than 26 million barrels per day, oil prices would remain high. Assuming only a brief conflict and the speedy restoration of two million bpd of Iraqi production by June, or its replacement from elsewhere in OPEC, Dated Brent would average almost $30 a barrel for the first half of the year.

A more protracted disruption to supplies, either in Iraq or Venezuela, would prolong the period of high oil prices in 2003, unless the shortfall was compensated by higher production from the OPEC or releases from the strategic stocks of the consuming countries.

These are very uncertain times, as far as the oil markets are concerned. All the signs point to a continuation of extreme price volatility over the next few months. Low stocks, robust demand, delays in replacing Venezuelan exports and uncertainty over Iraq will exert upward pressure on prices. However, rising OPEC supply, refinery turnarounds, an early resolution of the Iraqi and the Venezuelan crises or the release of oil from the Strategic Petroleum Reserve could also send prices plummeting. Indeed these are scenarios beyond the control of the OPEC and in case rising oil prices slow down the global economic recoveries, OPEC cannot and should not be blamed for it.