Oil prices are still on a swing. The past week it surged to the highest levels in more than a decade. The US crude crossed the $38 a barrel level mark. Even the Brent is hovering around $33 a barrel. High oil prices are making the markets jittery. Some have started to say that the current price levels could hurt the global economic recovery.

Being the largest oil producer, and despite denials — the only swing producer in the global oil equation — Saudi Arabia is definitely concerned about the higher than anticipated oil prices and its impact on the global economy. A global recession could never be a good omen for the oil producers’ every one concedes, including Saudi Arabia.

“We too are worried about the prices but we also look at fundamentals of demand,” the Saudi Oil Minister Ali Al-Naimi said in an interview. “I am convinced there are two reasons for such a high price — reduced quantity of petrol in America and speculators who are convinced there is going to be a lack of crude,” Al-Naimi told an Italian daily.

Not every one agrees to what Naimi has been saying on the market fundamentals.

The London-based Center for Global Energy Studies formed by Sheikh Ahmad Zaki Yamani, in its monthly oil report for March, published on 22nd of the month, suggests that oil prices are being driven by strong demand and low stocks, particularly in the US.

The oil demand growth is surging, reaching rates not seen since the Asian financial crisis of 1998.

The global oil stocks (including those held by governments, which will not be used by except to meet a major supply disruption) rose by just 0.1 million barrels a day last year, having tumbled by 0.8 million barrels a day in 2002 and 0.3 mbpd in 2001.

The level of demand cover provided by these stocks has fallen by nine days over the last two years.

It seems the US gasoline market is heading toward one of its tightest seasons for several years. When refineries in the US emerge from turnarounds next month, refiners will need to hike throughputs quickly, if they are to raise gasoline production before the start of the spring driving season.

In order to achieve this, the US will have to increase crude imports substantially. The CGES estimates that currently the US crude inventories remain “perilously close to minimum operating levels.”

Adding to these fundamentals in the oil market is the strength of the Asian demand, led by China, but now spreading across the rest of the region. China’s crude imports reached a new high of 2.4 million barrels a day in January this year.

The oil markets are thus currently behaving very differently today than everybody thought it would, barely six months ago. The biggest change has been in the strength of oil demand, yet neither OPEC nor the IEA has recognized it in their supply/demand balances, comments the prestigious London-based CGES.

It says the market is tighter than the OPEC thinks. Both OPEC and the IEA report huge stock builds and miscellaneous balancing items of 0.8-0.9 mbpd in 2003. But these are not manifested in the inventory level and hence the prices.

Although a seasonal downswing in the demand for OPEC oil is inevitable as the Northern Hemisphere winter draws to a close, the size of reduction in OPEC’s output required to prevent prices from falling below $28 a barrel appears to be small, at least in the coming quarter, the CGES report says.

But then the question arises, what is the price level the OPEC is trying to defend — the $25 a barrel — which most of the OPEC ministers seem to be professing or a minimum of $28 a barrel.

The CGES and a number of other analysts in the OECD think that the pre-emptive cut announced in Algiers indicates OPEC is trying to defend a minimum price level of $28 a barrel.

They say it has thus shifted upwards, without making any formal announcement, its minimum price target level to $28 a barrel. And the debate rages on.

However, keeping in view the market fundamentals, analysts strongly feel OPEC should have little difficulty in keeping the oil prices above $28 a barrel in 2004, even with smaller cuts in the coming quarters, unless oil demand is considerably weaker than earlier predicted.

OPEC definitely could not have bargained to be in a better position than this. An enviable position to be in indeed!