YEMEN - The Market Perspective.

Unlike in 1998, when Yemen suffered severely from a big fall in world oil prices, the markets on both sides of Suez now are strong and are likely to remain tight in the near future. There will be a shortage of reformulated gasoline in the US market, where crude oil prices influences world trades.

Iraq's oil production, which rose to a post-war peak of 3.1 million b/d in May, is expected to increase further in the coming months. Together with an increase in OPEC production, this will prevent crude oil prices from rising steeply. Since May, in fact, Iraq has overtaken Venezuela as the third largest OPEC producer.

The 8th phase of the UN-Iraq oil-for-aid deal for a six-month period began on June 8 when the UN Security Council passed a resolution to that effect. Now there is no limit to Iraqi oil sales under the UN deal.

However, the country's current production capacity may not be sustainable as most of the oilfields in operation need extensive repair. Most of the existing oil wells will have to be replaced by new ones because of increasing water encroachment.

UN approval for Baghdad to purchase up to $600m worth of spare parts would help in repairing much of its oil infrastructure. But replacement of producing wells may require development of additional oilfields. The UN Security Council might be compelled eventually to allow foreign companies to operate in Iraq.

The US has been behind the UN's lifting of the limit on Iraqi oil exports, as Washington wants market prices to be lowered. Iraq might be allowed to reopen its deep-water terminal at Khor Al Amaya in the Gulf and a parallel pipeline from Kirkuk to Turkey's Mediterranean terminal of Ceyhan. These would raise Iraq's export capacity to 3.4 million b/d.

Because most of Yemen's oil exports go to Asia, in 1998 the Asian economic crisis - the main cause of the fall in oil demand and prices - badly affected this country. By then oil stocks in the US and other parts of the world had been at their highest level since the collapse of prices in 1986.