Conditions are unlikely to change dramatically in 2005, with few analysts predicting an average price below $30. Scarce spare capacity and a dearth of major discoveries is focusing the minds of producers and consumers alike on the longer-term outlook, and their conclusions are broadly similar. The oil market map will look very different in two decades' time, but the Middle East will still be at its heart.

The reasons for the current price levels are well documented. Chinese demand growth has exceeded all expectations, followed - at a distance - by other major developing consumers such as India and Brazil. According to the International Energy Agency (IEA), world crude demand rose by 2.2 per cent, or 1.7 million barrels a day (b/d) in 2003 - the biggest hike since 1996 - with China accounting for a third of the increase. Beijing is belatedly moving to rein in its rampant economy, but so far to little effect.

Washington can only dream of economic growth on the same scale. But in spite of a sluggish recovery - not helped by having to pay $50 a barrel for its favourite commodity - American consumption is the other chief culprit for the price spike. Stronger than expected demand growth in 2003, a stretched refining system coupled with dislocation in product markets, and a vicious cycle of low stock levels have all moved world markets. A late start to the summer gasoline build-up in turn forced a late start to stockpiling of heating oil ahead of the winter chill, and current distillate inventories are well below the seasonal norm. The weather hasn't helped, with September's hurricanes knocking out a chunk of Gulf of Mexico production - yet to be fully restored - and cold snaps on both sides of the Atlantic sending a shiver through the market.

As well as the lack of spare capacity among producers, low stock cover in consumer countries heightens market sensitivities to the merest hint of disruption to the supply chain. Late 2004 has been a relatively quiet period in terms of major market events. Threats of strikes in Nigeria have had nothing like the impact of 2002's turmoil at Petroleos de Venezuela, which devastated the country's oil industry. Repeated attacks against Iraq's hydrocarbons infrastructure have periodically put a stop to output from the northern fields, but exports from the south have been consistently above the 1.5 million-b/d mark. Events in Russia are watched nervously as Moscow relentlessly pursues oil giant Yukos for billions of dollars in back taxes, and the politically charged affair will do little to endear Russia's oil industry to international investors. But the chances of substantial output losses always appeared slim and indeed have yet to materialise.

A report by Cambridge Energy Research Associates in late November put oversupply at 400,000 b/d on average in the fourth quarter. OPEC, including Iraq, produced some 30.8 million b/d in October - the most since November 1979 and at least 3 million b/d more than a year ago. Quotas have been raised four times in 2004, and even with the ceiling now at 27 million b/d, participating members are over-producing by almost 1 million b/d (see table).

OPEC faces a strange dilemma at its 10 December meeting in Cairo. Almost every factor - the supply/demand balance, record production, rising Iraqi output, the time of year, the usefulness of shut-in capacity as a market-management tool - seems to point to the need to trim output, at least in line with official ceilings. But at current price levels, it is in the interests of producers and consumers alike to stick with