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Oil Outlook

Want to join the guessing game? Here are some of the plausible crude oil scenarios.

By T.R. Vivek

Bitten by the oil mania

In the current geopolitical climate, predicting crude oil prices is as tough as, or as easy, as crystal gazing India's fortunes at the cricket World Cup. Yet, the guessing game is hard to resist. Which way will prices go?

First, the current circumstances. Crude oil prices shot to a fresh two-year high of over $33 per barrel on January 15 after UN weapons inspector Hans Blix ordered Iraq to submit credible evidence of weapons of mass destruction, or face war. Iraq, with an estimated 112 billion barrels, has the world's second-largest oil reserves after Saudi Arabia, and its 2 million barrels per day (bpd) supply is at risk of being choked (at least momentarily). Venezuela's strike has already choked its 3 million bpd, and US oil stocks are running low. Yes, OPEC has agreed to open the spigots by 1.5 million bpd to keep prices in its target band of $22-28 per barrel... but the efficacy of this move is still under some doubt.

Saudi Arabia, for its part, is promising to make good any shortfalls in oil supply (it has almost 2 million bpd in excess capacity, which gives it much strategic leverage) in the event of any disruption. Yet, nobody is too sure about what might happen over the next six months.

"There is no fundamental rationale in predicting what would happen to oil prices. But since 1999, we have seen a sense of discipline in the OPEC, which has managed to keep prices in the $22-28 band," says Rajeev Thakur, AGM and Group Head of Research at the credit rating agency ICRA.

What might be the possible scenarios? Here's a back-of-the-envelope gist:

A. Current situation endures. Crude oil prices will remain pivoted around the $30 per barrel point, with deviation of about $2 up and down depending on the current trading sentiment. Uncertainty continues.

B. Disaster scenario. The US takes rash action in West Asia, finds itself in a messy conflagration that envelops the entire region, and faces such large-scale disruption as to send the global oil market into prolonged turmoil. Oil shortage of 6-10 million bpd. Prices scale $50 per barrel, spiking to $60-70 on panic moments.

C. Uncle Sam flexes his own muscle. The US achieves short-term military objective with a sudden flash of firepower that places Iraq's oil industry at the superpower's command with minimal damage to oil infrastructure. Iraq maximizes production, to 3 million bpd, and gets investments to raise this to 5 million bpd by 2005, regardless of OPEC. Oil prices shoot to $40 on news of the attack, quickly fall to $25 on news of US success, and then start declining slowly to the $15 level over the next two years... and so, till the next major flare-up.

D. The UN and US use minds and muscle. Bad cop US pressures Iraq, good cop UN works on global opinion. Together, they achieve a longer-term objective -- of liberating Iraq without resorting to firepower, with the oil-fields working in favour of the country's self-determined interests. Iraqi oil production rises by 1 million bpd, without sending prices into a tailspin. The prices decline to $24 per barrel, nicely within the OPEC target band. Market watchers heave a sigh of relief.

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