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Saudi Arabia says oil prices high enough

Tuesday, May 11, 2004

RIYADH, Saudi Arabia -- In a significant shift, Saudi Arabia's oil minister said Monday that crude prices have risen far enough, and he will urge OPEC to increase production, reversing an output cut that began just last month.

The change in policy, Oil Minister Ali Naimi said, is due to concern that high prices could hurt the world economy and reduce demand for oil. Oil prices have risen steadily in recent weeks, with U.S. crude prices touching $40 a barrel on Friday.

"It is certain that the kingdom believes that increasing the OPEC production ceiling is essential to keep supply and demand balanced," Naimi said in a statement.

He said the increase, which he planned to propose at a June 3 meeting of the Organization of Petroleum Exporting Countries, should "not be less than 1.5 million barrels a day."

That would more than offset the 1 million barrel-a-day cut in OPEC's production target that went into effect April 1. However, a boost in the production ceiling might have little real effect, analysts said, as most OPEC countries are producing well over their quotas.

"It's going to change the quotas more than it's going to change production," said analyst Adam Sieminski of Deutsche Bank in London.

OPEC pumps about a third of the world's oil, and Saudi Arabia is its biggest producer and de facto leader.

Crude oil prices briefly plunged after the announcement. Contracts of U.S. light, sweet crude for June delivery fell by $1.65 a barrel on the New York Mercantile Exchange before recovering to $39.45, down 48 cents.

June contracts of Brent crude tumbled by $1.67 a barrel on the International Petroleum Exchange in London but rebounded somewhat and were 70 cents lower at $36.30 in late trading.

The change in Saudi oil policy came only weeks after Washington Post journalist Bob Woodward said in a new book that Saudi Arabia had made a deal with the White House to increase oil production to drive down U.S. gasoline prices and help President Bush win re-election. Saudi and U.S. officials denied the report.

Analyst Jan Stuart of FIMAT USA, a New York brokerage, said the Saudi decision was "very curious."

"It's diametrically opposite to everything Naimi has been saying" about supplies being adequate to meet demand, he said. "It's the first noise from anyone in OPEC about raising output."

OPEC currently has an official ceiling of 23.5 million barrels a day, but analysts and some officials say OPEC countries are producing more than 2 million barrels a day above that. Other than Saudi Arabia, few OPEC countries have the capacity to quickly increase output, so a higher ceiling would effectively legitimize some of the overproduction instead of adding a lot of fresh crude to global supplies.

"That's not a promise of more production," said analyst Paul Horsnell of Barclays Capital in London.

At their March meeting in Vienna, Austria, OPEC members decided to cut production by 1 million barrels a day, despite warnings by analysts that oil prices would surge.

Kuwait's energy minister, Sheik Ahmed Fahd Al Ahmed Al Sabah, praised Naimi's new position, saying it justified Kuwait's opposition to the March cut.

"This position agrees with ... what Kuwait had called for in the last OPEC meeting that the cut ... should not be implemented," the Kuwaiti minister said.

Naimi said he would discuss the market situation with other OPEC members May 22 through 24 at the International Energy Forum in Amsterdam. OPEC's June meeting will be held in Beirut, Lebanon.

He said recent price increases were a "major concern" to Saudi Arabia.

"We do not want to see prices rise to the level that they negatively affect the growth of the international economy or the demand for oil," he said.

The minister said the primary reason for higher oil prices is "the market's unwarranted fear of disruptions in supplies from some oil producing countries and regions at a time when only the kingdom and probably two or three other countries have spare production capacity."

Market speculation is another factor, he said. He said traders were holding long-term contracts for commodities such as oil because economic growth was robust and interest rates were low.

Traders said last week they were increasingly worried about the possibility of attacks against oil industry targets in the Middle East at a time when supplies are tight and demand is strong.

Oil for June delivery rose as high as $40 in Nymex trading Friday before settling at $39.93. The average retail price of gasoline in the United States is $1.89 per gallon, according to AAA.


Associated Press writer Bruce Stanley contributed to this report from London.


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