-----BEGIN PGP SIGNED MESSAGE----- Hash: SHA1 <http://online.wsj.com/article_print/0,,SB111282627132800108,00.html>
The Wall Street Journal April 7, 2005 PAGE ONE As Oil Demand Surges, Saudis Offer to Boost Output Rare Move Aims to Head Off Cuts, Backlash From Buyers; Meeting With Bush Looms By BHUSHAN BAHREE Staff Reporter of THE WALL STREET JOURNAL April 7, 2005; Page A1 Saudi Arabia, the world's largest oil exporter, is telling petroleum buyers it will supply them with all the oil they want to help them build up inventories ahead of an expected sharp rise in energy demand later this year. The Saudi offer to pump up to the limits of their capacity comes amid the continued surge in oil prices, which are near a recent high after more than a year of volatility. The Saudis have operated at such capacity just twice in recent years, on the eve of the Iraq invasion of 2003 and last year after U.S. hurricanes hit the American oil patch. The kingdom is acting now because it is getting anxious that the run-up in oil prices could backfire on oil nations later this year by damping global economic growth and thus energy demand, said a senior official at the Organization of Petroleum Exporting Countries who is familiar with the Saudi policy. Earlier this week, Saudi Arabia lowered its export prices to attract buyers of its crude for similar reasons. Last month, OPEC promised to produce more oil, but that move has had little impact on prices. The Saudi vow to meet all orders goes well beyond the cartel's March decision to raise its output ceiling, and sidesteps bickering among members over whether to raise the limit even further. Oil prices have risen sharply in volatile trading since early last year, when it became clear that global demand for petroleum was rising much faster than expected, and briefly exceeded $58 a barrel in New York futures trading earlier this week. That represented a new high, though the price of oil remains far below its level of the early 1980s when adjusted for inflation. Yesterday, the benchmark price of May delivery oil settled at $55.85 a barrel, down 19 cents, on the New York Mercantile Exchange. Even after the sustained high prices, demand is growing in the U.S., the world's largest market, despite rising gas prices. (See related article1.) Demand also has stayed high in China and India, Asia's booming economies, which are expected to ramp up their thirst for oil much more in the years ahead. Still, higher prices are slowing the world economy, and continued increases this year could add to the pain. The International Energy Agency estimates that oil demand will rise to 86.1 million barrels a day in this year's fourth quarter -- up 3.3 million barrels a day, or nearly 4%, from the current quarter. The forecast increase is more than double Saudi Arabia's current spare output capacity of 1.5 million barrels a day. Last week, Goldman Sachs said in a report that the world was entering a super price-spike period during which prices could rise to as much as $105 a barrel before demand wanes and moderates markets. The Saudi offer comes as the kingdom's Crown Prince Abdullah has accepted a White House invitation to visit President Bush at his ranch in Crawford, Texas, later this month. While officials say that visit isn't likely to be devoted entirely to oil issues, the topic is sure to be high on the agenda. The Saudi leader may be eager to explain the steps he is taking to ease a growing economic problem amid assertions that his country isn't moving fast enough to meet the president's challenge to Arab states to embrace democracy. The Saudis still are stinging from American criticism about their overall responses to the war on terrorism. More than that, the Saudis may be looking for the president to use the visit as an occasion to give them public credit for their moves. Indeed, the Saudis could be moving to head off a global backlash if prices continue to rise. Consumers looking at surging prices for gasoline and heating oil often don't distinguish between the Saudis and OPEC members that export the crude and the companies that refine and sell it. By offering to produce to the limit, the Saudis are sending a signal that they shouldn't be blamed if oil companies and refiners don't buy the crude, or if prices rise because the global refining system can't process more crude. Inventories of crude oil have been rising in the U.S. lately. Yesterday, the Department of Energy reported another weekly increase in the country's inventories of crude oil, which rose 2.4 million barrels to 317.1 million barrels. But gasoline inventories fell, and analysts say that as refineries start to churn out transport fuels at a higher level for the summer driving season, crude-oil inventories will start to be depleted. The move is clearly a gamble for the Saudis. For one thing, if buyers take up the offer, the world will be left with precious little spare capacity to pump oil in the event of a disruption to supplies. Moreover, some OPEC and industry officials doubt that refiners and others will want to add to inventories at the current high prices, which increase financing costs and pose risks in the event of a price drop. A barrel of oil costs about 50 cents a month to keep in inventory. Buyers could balk if they think the ultimate Saudi aim is to lower prices. Buyers typically tend to hold off their purchases when prices start declining, in the hope that they can buy oil even cheaper. For its part, OPEC, the 11-member oil cartel, has been wary of letting inventories rise in recent years, because increased inventories in the hands of refiners and oil companies cut the power of Saudi Arabia and OPEC to influence prices. Buyers with fattened inventories have greater protection against further rises in prices, since inventories act as a cushion against sudden supply shocks or demand increases. Still, with prices approaching $60 a barrel, Saudi Arabia and OPEC have become concerned about lasting damage to the world economy and to their own economic well-being. High prices eventually are expected to alter consumers' behavior, reducing their use of oil, and encourage alternative supplies of oil and other energy sources. At a ministerial meeting in Iran last month, Saudi Arabia's oil minister, Ali Naimi, pushed the cartel into approving a modest increase in its output ceiling to 27.5 million barrels a day from 27 million barrels a day. That attempt failed to moderate global oil markets. OPEC's president, Sheik Ahmed Fahd al Ahmed al Sabah of Kuwait, has renewed ministerial consultations in recent days to authorize a further increase of 500,000 barrels a day in the output ceiling. But senior OPEC officials say that many of the cartel's members want to see whether prices remain at high levels -- above $55 a barrel -- for a couple of weeks before authorizing any more pumping. But Saudi Arabia has rendered such action moot. "Right now, Saudi Arabia is meeting customers' needs, whatever they want," said one senior OPEC official familiar with Saudi oil policy. "For OPEC and for Saudi Arabia, from now on, there are no [supply] constraints," he said. Another increase in the cartel's output limit would be nothing more than "symbolic," he said. By offering to produce more, and slashing their prices, the Saudis are basically forcing other exporters, both those in OPEC and non-members like Mexico, to lower their own prices for comparable quality crudes, or lose customers. In offering to produce all of the oil it can now, Saudi Arabia is taking a policy U-turn by making clear it wants consumers to fatten inventories. Since 1999, a Saudi-led OPEC has made sure that inventories in customers' hands don't build to such levels that they threaten the cartel's influence. Saudi Arabia exports oil largely through long-term contracts with its customers. Early every month, the Saudis announce the prices of the various grades of their oil and, by the second week, buyers tell the kingdom the volumes they want to buy. The Saudis then decide the percentage of oil they will allocate to each buyer. When they want to sell more oil than the contracted amounts, the Saudis offer more than 100% of the so-called nominations by buyers. Early this week, the Saudis reduced the prices of their various grades of oil, making the oil more attractive for buyers. By next week, the Saudis will know just how much oil their customers want to buy. Last month, the Saudis produced 9.5 million barrels a day of oil to meet their customers' needs, up from about 9.2 million barrels a day the previous month. Saudi Arabia says it can produce as much as 11 million barrels a day. But industry officials note that as the kingdom approaches its limits, the oil that it can produce is medium and heavy-grade crude. That is less attractive to refiners than light, low-sulfur crudes, since many refiners have no remaining capacity to process the heavier oil into products like gasoline and diesel. - -- - ----------------- R. A. Hettinga <mailto: [EMAIL PROTECTED]> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire' -----BEGIN PGP SIGNATURE----- Version: PGP Desktop 9.0.0 (Build 1917) iQA/AwUBQlWmOMPxH8jf3ohaEQLPsQCg1F1/bVTLl8JOXMC05a61w7+IhNYAn2Fe yfLVPjf1lQZ9edep8K4U8XaR =91AM -----END PGP SIGNATURE----- ------------------------ Yahoo! Groups Sponsor --------------------~--> Give underprivileged students the materials they need to learn. Bring education to life by funding a specific classroom project. http://us.click.yahoo.com/FHLuJD/_WnJAA/cUmLAA/TySplB/TM --------------------------------------------------------------------~-> -------------------------- Want to discuss this topic? Head on over to our discussion list, [EMAIL PROTECTED] -------------------------- Brooks Isoldi, editor [EMAIL PROTECTED] http://www.intellnet.org Post message: osint@yahoogroups.com Subscribe: [EMAIL PROTECTED] Unsubscribe: [EMAIL PROTECTED] *** FAIR USE NOTICE. This message contains copyrighted material whose use has not been specifically authorized by the copyright owner. OSINT, as a part of The Intelligence Network, is making it available without profit to OSINT YahooGroups members who have expressed a prior interest in receiving the included information in their efforts to advance the understanding of intelligence and law enforcement organizations, their activities, methods, techniques, human rights, civil liberties, social justice and other intelligence related issues, for non-profit research and educational purposes only. We believe that this constitutes a 'fair use' of the copyrighted material as provided for in section 107 of the U.S. Copyright Law. If you wish to use this copyrighted material for purposes of your own that go beyond 'fair use,' you must obtain permission from the copyright owner. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml Yahoo! Groups Links <*> To visit your group on the web, go to: http://groups.yahoo.com/group/osint/ <*> To unsubscribe from this group, send an email to: [EMAIL PROTECTED] <*> Your use of Yahoo! Groups is subject to: http://docs.yahoo.com/info/terms/
