Date:25/04/2003 URL: http://www.thehindu.com/2003/04/25/stories/2003042502421600.htm

Business

Crude prices to remain volatile

By Our Special Correspondent

NEW DELHI APRIL 24. International crude oil prices are likely to remain volatile in the months to come, however, by the end of the year, they could fall to around $22 a barrel.

This was stated here today by M. S. Ramachandran, Chairman and Managing Director, Indian Oil Corporation, while delivering the first `Distinguished Lecture Series' on hydrocarbons at the Confederation of Indian Industry (CII). He was speaking on `Iraq crisis-impact on oil pricing and supplies".

Mr. Ramachandran said that this uncertainty would prevail because it was not clear who was legally controlling Iraq's oil, to which buyers could contract with.

Most of the damage to Iraq's oil industry took place in southern Iraq, which lay in the path of the military, as it moved in from Kuwait, he added.

The oil from southern Iraq called Basra Light Crude was what suited Indian refineries the best. It would take some time to repair this infrastructure.

Volatility in oil prices would also stay high because, today, world supply and demand was finely balanced, and there was less inventory than before, he said.

He said this would mean that any short-term imbalance such as developments in Nigeria could also result in oil prices changing.

In the medium term, Iraq, which had the second largest reserves in the world, could double its output, which would result in more oil flowing out of the country, leading to lower international prices.

The critical issue that could stop this was whether the Organisation of Petroleum Exporting Countries (OPEC) could maintain its unity. Iraq was a founding member of OPEC, but the U.S. would influence whether Iraq would stay in OPEC. If it stayed, then the rest of OPEC would have to reduce their oil production to accommodate Iraq and produce the 28.5 million barrels a day that it had committed, he said.

Mr. Ramachandran said it was in Iraq's interest to produce more so that it could pay for its reconstruction.

Also, lower oil prices would help the Western world, which was on the brink of a recession.

For India, though, what mattered was the average price of oil for the whole year, not temporary spikes, and so far in 2003, the average price had been $30 a barrel as compared to $25 in 2002 and even lower in 2001.

Therefore, India would welcome lower oil prices.