Oil price sinks as Saudi promises more crude

Oil price sinks as Saudi promises more crude
Richard Mably

LONDON, JULY 4: Oil prices tumbled on Tuesday as dealers took seriously a Saudi pledge to raise crude output within the next few days. A surprise statement from Saudi Oil Minister Ali al-Naimilate on Monday revealed that Riyadh was planning to raise exports again just days after a second OPEC production increase this year.

London Brent blend futures by mid-day was off $ 1.45 at $ 29.65 a barrel. Prices have much further to fall to reach OPEC's target of $25. Market analysts said evidence that Saudi Arabia appeared prepared to go it alone to bring prices down was sure to hit the oil market hard.

"They're telling the market that prices have peaked. They are saying to traders that if you want to follow the trend then sell. I expect prices to go very quickly down through $30," said Roger Diwan of Washington's Petroleum Finance Corp.

"Judging by the astounded reaction from other OPEC members it is a unilateral move which stamps Saudi Arabia's authority on the world oil market," said Lawrence Eagles of brokers GNI.

The Saudi initiative comes 10 days after OPEC agreed a modest supply increment that failed to push prices down to the $25 a barrel comfort zone that satisfies both producers and their major customers, including the United States. "If the price does not decrease, Saudi Arabia, in conjunction with other producers, will increase production by 500,000 bpd within the next few days," Naimi said in an interview with the official Saudi Press Agency.

But an OPEC delegate said that Riyadh would move unilaterally if others in the Organisation of the Petroleum Exporting Countries could not respond. Riyadh controls more than two million barrels a day of spare capacity that can be brought on stream immediately. Only Kuwait and the United Arab Emirates in OPEC and non-OPEC Mexico can also squeeze out a few extra barrels.

Saudi Arabia's fellow OPEC producers were left stunned by the move. Big cartel producers Venezuela, Kuwait and Iran said they had no knowledge of the Saudi plan. Tehran reacted angrily calling the development "news hype."

"There is no reason to violate agreements and succumb to lawlessness and act unilaterally," the Iranian news agency quoted an Iranian oil ministry official saying. "I have no knowledge about this issue," said Kuwaiti Oil Minister Sheikh Saud Nasser al-Sabah. "This requires consultation with other producing countries."

By contrast, Saudi's non-OPEC ally Mexico and Washington appeared both to be in the loop. A Mexican official said his country had been made aware of the Saudi move and had the capacity to raise production if necessary. US Vice President Al Gore quickly offered his congratulations and called on US oil companies to pass any price cuts through to consumers at the petrol pump.

OPEC on June 21 agreed to lift supplies 708,000 bpd to 25.4 million bpd, topping up a 1.7 million bpd increase in March. Saudi Arabia's leading customers said they had already been approached to take more oil but that it was difficult to say exactly how much the kingdom was planning to pump.