Saudi Arabia’s plan to boost oil output by 500,000 barrels a day is likely to lead to cheaper crude and a slight easing in the prices consumers pay for gasoline and heating oil, energy analysts said yesterday.
The world’s No. 1 oil producer decided to boost production after it became clear that an increase agreed by Organization of the Petroleum Exporting Countries (OPEC) oil ministers last month was not enough to trim prices from levels in excess of $30 a barrel.
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The United States and other importers have been demanding a sharp cut in crude prices. The Saudi move could ease prices down to a more sustainable $25.
Saudi Arabia said late Monday that it expects to raise output within a few days, a move that dismayed fellow OPEC members Iran and Iraq.
Iraqi Oil Minister Amer Mohammed Rashid said the Saudi action was “totally unwarranted” and accused the country of yielding to U.S. pressure.
In Iran, OPEC’s second-largest producer, the official Islamic Republic News Agency quoted an unnamed oil ministry source as saying there was no reason for Saudi Arabia to take unilateral action.
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By GlobalData“The signal is quite clear: By hook or by crook, they’ll bring the price down,” said Mehdi Varzi, a senior analyst at investment bank Dresdner Kleinwort Benson in London.
It was not immediately clear if Saudi Arabia was prepared to act completely on its own. Saudi Oil Minister Ali Naimi told his country’s official news agency that his government would consult with its fellow members of the Organization of Petroleum Exporting Countries before adding to world supplies.
However, Kuwait and the United Arab Emirates are the only other OPEC members with the capacity to produce much more oil. Saudi Arabia has a spare production capacity of 2.3 million barrels per day, far more than any of the group’s other 10 members.
The declared production target represents a 2 percent rise from OPEC’s official output of 25.4 million barrels a day. OPEC oil ministers already agreed to raise output by 708,000 barrels a day at a June 21 meeting in Vienna, Austria.
David Knapp, a senior economist at the International Energy Agency in Paris, said the Saudi announcement came as little surprise.
“This could well be the second part of a preplanned strategy. If prices came down after the Vienna meeting, they probably wouldn’t have done anything,” he said.
Saudi Arabia has frequently expressed concern over crude prices, which have tripled since December 1998. Expensive oil discourages consumption and can tempt non-OPEC producers to pump more crude of their own, thereby creating the risk of a global collapse in prices.
“I think they do realize that very high oil prices, in excess of $30, are of very little long-term benefit for OPEC,” said Mark Redway of the London brokerage Greig Middleton and Co. Ltd.
In the United States, where stiff prices at gas stations have become an issue in the presidential election campaign, word of a Saudi production increase was welcomed.
Analysts said it was too early to quantify the likely impact on gasoline prices, but Mr. Varzi said motorists can expect some relief at the pump “within weeks rather than months.”
The Saudi announcement came after markets had closed for the day Monday; trading on the New York Mercantile Exchange remained closed yesterday for the Independence Day holiday.
August contracts of North Sea Brent crude dropped by $1.52 a barrel to $29.58 at the end of trading yesterday on the International Petroleum Exchange in London.
However, the new crude would not arrive at U.S. refineries before the middle of August, as the peak summer driving season draws to an end, and any benefit for motorists is likely to be modest.
Jeremy Elden of Lehman Brothers in London predicted that prices at the pump would drop by no more than 11.5 cents a gallon.
Additional Saudi crude would probably have a bigger influence on prices for heating oil.
The fresh barrels would reach importing nations as the autumn demand for heating oil picks up. Also, the relatively heavy grade of Saudi oil means it would be better suited for the production of heating oil than for gasoline, said Mr. Knapp of the IEA.
