Saudi output pledge likely to ease prices

April 25, 2012 at 6:58 AM   |   Comments

LONDON, April 25 (UPI) -- Saudi assurances the kingdom can and will increase crude oil output to dampen prices is exactly what the market needs, a London think tank said.

The Center for Global Energy Studies said the Saudi position on boosting output to depress the market had gone through "a much-needed overhaul" after earlier government comments sent prices spiraling in response to anxiety over supplies.

Saudi Oil Minister Ali Naimi caused concern in the oil trade in March after he appeared to rule out higher production, arguing that demand didn't exist to justify greater Saudi supplies.

Last week the minister changed tack and declared the kingdom wasn't happy with the high level of oil prices, was determined to see them come down and was working toward that goal.

Naimi said Saudi production rose from 9.9 million barrels a day in March to 10 million barrels per day in April and further Saudi capacity existed to boost production to 12.5 million barrels per day if needed.

Naimi's shift on the kingdom's oil production and capacity followed a flurry of media comment and analyses that cast doubt on Saudi Arabia's actual oil reserves and its capacity to sustain higher production.

Some analyses cited Saudi Arabia's diminishing usefulness to Western strategic interests, a sensitive subject in the capital Riyadh.

CGES said Naimi's revised position would comfort those who felt alarmed by his March comments.

"The tone of Ali Naimi's earlier remarks, which appeared to deny that Saudi Arabia had any means of influencing oil prices, did little to comfort the market.

"The later comments, in which the minister gave a clear indication of how the kingdom would use its position as the holder of most of the world's spare capacity to influence prices, was exactly what the market needed," CGES said.

Crude oil prices have yet to react substantially to Naimi's assurances and climbed close to $104 per barrel in New York trading Monday but mostly in response to European supply concerns. West Texas Intermediate crude oil for June delivery added 77 cents and hit $103.88 on the New York Mercantile Exchange.

The think tank said Naimi's change of heart could be due to late realization that higher prices would hurt growth not only in the emerging markets but also India and China, two long-term customers for Saudi oil.

Already China's growth is under closer scrutiny because of continuing recession in the industrial countries that are members of the Organization of Economic Cooperation and Development.

"A prolonged economic depression in the OECD countries would undermine China's export‐led growth, hitting its oil demand and the market for Saudi Arabia's crude," CGES said.

However, it said, Saudi Arabia wouldn't want the oil price to fall to less than $100 a barrel.

Oil industry analysts say success in Iran nuclear talks is likely to depress prices on perception of ample long-term global supplies in the market. A negotiation breakthrough may prompt Saudi Arabia to shift its production policy again to ensure prices don't drop much below $100 a barrel.

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