By Faisal Islam

25-08-03 A summer time swagger is being seen among the markets and economic figures suggest scope for optimism. It's not boom-time yet, but the cautious rumblings of a rebound are being felt.
Yet that longstanding economic banana skin, the oil price, has unexpectedly reappeared. The price of a barrel of Brent crude oil crept above $ 30.
"Crude oil prices are likely to stay higher than we thought for some time, and might not decline as much as we hoped next year," said Eric Chaney, economics analyst at Morgan Stanley.

Despite relatively slow GDP growth, the end of the main hostilities in Iraq has done nothing to bring down oil prices. The 1991 Gulf conflict saw oil prices collapse to $ 16 as soon as it was clear that Saddam Hussein's troops would be leaving Kuwait. But crude oil, and petrol pump prices, have stayed remarkably high -- and that may not be a temporary phenomenon.
OPEC, the oil producers' cartel often fingered as the chief culprit, will only shoulder a small part of the blame. During the Nineties Gulf conflict Saudi Arabia turned the taps on, helping the oil price collapse by more than half. This time the Saudis were more conservative.

Saudi oil production went from 8.5 mm bpd in January, up to 9.6 mm during the war in April, but then dropped again, to 8.7 mm, in June. This replaced Iraqi oil lost from global production. After the sabotage of the key Ceyhan pipeline, production is unlikely to top 700,000 bpd this month. In February it was 2.5 mm bpd.
"After the military side went well, markets thought Iraqi production would be back onstream rapidly, so other producers cut back quickly, probably a little too early," said Leo Drollas of the Centre for Global Energy Studies. But security problems, sabotage, smuggling and power failures have left official exports at just 300,000 bpd, a blip on the global market. At the same time, the threat of Iraq's oil -- it could be pumping 8 mm bpd within a decade -- has prompted an unusual discipline among OPEC members.

At the start of the year the cartel was beset with quota busting amounting to more than 3 mm bpd. The latest survey shows that total OPEC production is within half a mm bpd of its quotas, keeping prices at the high end of its $ 22-$ 28 target range.
The lack of Iraqi oil may have pushed it higher still, but the real reasons for the longevity of high oil prices are not in the Middle East but in Louisiana and China. In that southern US state and in neighbouring Texas lie huge salt-lined caverns that house America's strategic petroleum reserves. After 11 September 2001, President Bush said he wanted to increase the oil in the reserve from 600 mm barrels to 700 mm barrels by the end of 2005. This huge cache of black gold would serve as emergency stocks should any unfriendly country choose to halt exports, or should there be a repeat of Venezuela's political turmoil, which hoisted oil prices above $ 35 in December.

Then President Bush stopped adding to the reserve to alleviate pressure on the oil price. In May, he turned the taps back on again and the US administration has been paying top dollars -- of more than $ 30 a barrel -- for 11 mm barrels of oil. Democratic senator Carl Levin accused the Bush administration of foisting high oil prices on the world.
"This administration's actions to fill the (reserves) regardless of the price for oil available to the commercial sector, is a major reason for these high prices," Levin said in a letter to the US Energy Secretary, Spencer Abraham. But the administration has stuck to the plan, despite a slump in oil inventories at refineries to within 3.4 % of the 28-year-lows reached in February.
"In effect, the Department of Energy's (reserves) programme has transferred 10 mm barrels from private sector inventories into the (reserves) over the past two-and-a-half months at significant cost to taxpayers," said Levin.

Those low, private-sector inventories feed directly into hikes in the price of crude. Yet the plan, proving a political football in the gas-guzzling belt of America, is being copied all over the world.
The European Commission is attempting to coordinate a European strategic reserve, though Britain points out that the International Energy Agency (IEA) already does this. The US has also been urging India to create a similar reserve in salt-lined caverns that can hold 45 days of emergency stocks.

Extra stores of crude oil could help the US keep OPEC in check. Large oil consumers have been lobbying the mainly Middle Eastern cartel, but OPEC kept quotas stable at its last meeting. Ironically, however, the very act of boosting the reserves has added considerable buoyancy to oil prices in the short term.
"They've continued filling the reserve -- which is crazy, putting the oil under ground when its needed in refineries," said Drollas.
But this is not the only development. Last week's IEA monthly report raised baseline 2001 non-OECD demand by 260,000 bpd.
"The IEA is indeed acknowledging that demand from developing economies, such as Iran and India, is structurally higher than generally assumed. The same can be said for China," said Morgan Stanley's Chaney.

Imports of oil into China were up a third, year-on-year, in the first half of this year, as the country shrugged off the economic effects of the SARS virus far more quickly than had been expected. Robust economic growth and a craze for cars have fanned demand for crude.
China is increasingly relying on imported oil, and is in talks with Russian firms over a possible pipeline. This year it initiated its own strategic oil reserve programme to insulate its economy from any supply disruptions.

Extra demand for the winter season has kicked into the market far earlier than expected. The key variable now is the weather. If the freak heat waves in Europe continue, oil prices should fall. But a winter as cold as last year will see refiners and producers under huge pressure, and it will be down to the oil producers' cartel.
"But OPEC's in a jam because they can't anticipate how Iraq will go, so they'll be cautious at the next meeting on the 24 September," said Drollas. So for now oil prices are expected to remain buoyant, casting a dark shadow over the nascent signs of recovery.