Dubai (Platts)--30Mar2009

OPEC's decision to cut crude production by a combined 4.2 million b/d
last year put a floor under oil prices and prevented a collapse, balanced the
oil market and prevented an "unusual and uncontrolled" build in stocks, a
senior Saudi oil adviser said in a comprehensive review of the market.

Ibrahim al-Muhanna, an adviser to Saudi Oil Minister Ali Naimi, said in a
paper presented to a March 28 meeting of the Organization of the Arab
Petroleum Exporting Countries that OPEC's decision to cut had come under
"harsh" attack from Western oil consuming nations, including the US, Britain
and consumer watchdog the IEA, which saw the move as "unreasonable."

"Time has proved OPEC right and its critics wrong," wrote Muhanna.

Despite OPEC's "realistic" decisions, non-cooperation by other main oil
producers outside OPEC and the extent of compliance by OPEC members with
previous and current production cuts are still key issues, he said.

These are being compounded by doubts within some producing countries and
differences between one secondary source and another as to the level of
compliance by OPEC members, Muhanna said, noting that in some instances the
difference in estimates of compliance is more than 1 million b/d.

"This is having an impact on OPEC's decisions and its credibility not
only in the outside world but within OPEC itself," he said.

"Notwithstanding this problem, the organization's decisions to reduce
production contributed to preventing a further unusual and uncontrolled rise
in commercial stocks while also contributing to restoring market balance and
putting a floor under oil prices and preventing a collapse," said Muhanna, who
is a long-standing member of Saudi Arabia's OPEC delegation.

Reviewing developments in the oil market in light of the financial
crisis, Muhanna said the speed at which energy demand will recover depends on
whether the contraction in the global economy is due to a correction or was
just a normal economic cycle, which typically lasts 18 months.

"If the crisis ends with the end of this year, then demand for oil will
start to grow from next year but at a slower pace than it has done in previous
years. However, if the crisis lasts another year or two, then demand for
petroleum is not expected to start rising until 2011 or even 2012," he said.

"The other side of the equation is the type of the current crisis. Is it
a correction or an economic cycle? And there is a big difference between the
two and their impact on petroleum. If it is the latter, then the global
economy, including demand and the prices of various commodities such as
petroleum will continue at current levels--$40-$50/b for crude oil--for
several years," he said.

"However, if it is just a normal economic cycle, oil prices will start to
move up again, probably starting the end of this year or early next year to
around $70-$80/b."

"It is obvious that the international oil market and the industry in
general has entered a critical turning point and faces big challenges, some of
them related to the sharp rise and subsequent fall in oil prices," he said.

As well as dealing with continued price volatility, "we are seeing a
return of a wave of hostility from some Western countries under the guise of
energy security, protecting the environment and fighting global warming,"
Muhanna said, in apparent reference to US President Barack Obama's pledge to
cut dependence on foreign oil, particularly Middle Eastern oil.

"As a result of the economic crisis and the policies called for by
Western states as far as lessening dependence on oil is concerned, demand for
petroleum is not expected to grow at the same levels as the last 10 years when
demand rose from 73 million b/d in 1997 to 86 million b/d in 2007," he said.

Demand this year is expected to fall by more than 1 million b/d, the
biggest decline in the last 26 years, he said. Global demand for 2008-2009
will fall by between 1.5 and 2 million b/d.

The future energy map will look very different, said Muhanna. In the 30
OECD states, where demand peaked three years ago and then began to decline as
their economies matured, demand for oil will have fallen by 4 million b/d
since 2005, and their share of global consumption will fall from 63% in 2000
to around 46% in 2020.

Emerging economies such as China, India, Brazil, which are still enjoying
strong economic growth despite the crisis, are expected to see this continue,
pulling their oil demand up at the same time.

Demand will also driven by growth in the Arab oil exporting states of
OAPEC, and in particular in countries where oil products consumption is high
due to fixed prices not linked to international prices.

However, Muhanna said these prices were not sustainable and urged Arab
oil producers to link domestic product prices to international levels, except
for products supplied to industries that give added value.

In general, supply is expected to grow in line with demand over the next
few years. Supply from some regions such as Mexico, Russia, the North Sea,
Egypt, Syria and Yemen is expected to decline, with volumes rising from the
Caspian Sea, West Africa and Brazil.
--Kate Dourian, kate_dourian@platts.com