Posted on 06/06/2006 1:06:58 PM PDT by thackney
With Saudi Arabia's latest revelation, there's one less mystery to what's been behind oil price strength over the past few months.
While Saudi Arabia has said it's investing heavily to raise its oil output capacity to 12.5 million barrels a day in 2009 from 11.3 million b/d, the world's No. 1 crude producer has been quietly cutting back current volumes.
Saudi Oil Minister Ali Naimi, in an interview with The Wall Street Journal published Monday, said the country's output in April averaged 9.1 million b/d, its lowest level since January 2005.
Global oil prices have risen 10% from a first-quarter average of $65 a barrel to hold above $70 since the cut was implemented.
Naimi, speaking after the Caracas meeting of the Organization of Petroleum Exporting Countries, said the reduction was in response to a drop in demand, not an attempt to limit supply and prop up prices.
The oil minister suggested that the Saudis and others in OPEC would be happy to sell all the oil they could at current prices, implying that the Kingdom will lift supplies when demand from refiners increases.
The policy solidifies the Saudis' preference to act as a price-taker rather a price-maker in the current market, as Naimi ruled out discounting oil to sell it or offering cargoes on the spot market.
"We will not leave money on the table," Naimi said.
The Saudi attitude seems to suggest that, while the Kingdom might not directly endorse the current level of global prices, there is an attitude of acceptance and the Saudis clearly aren't going to act aggressively to bring it down.
Analysts said that while they couldn't quantify where prices would be if the Saudis hadn't taken a deliberate decision to reduce their output, oil prices most certainly would be weaker.
Don't Count On Saudis To Lower Price
The oil market, more than ever, has come to resemble an intricate Persian carpet, with many factors tightly woven together. Unraveling it can't be done by pulling on a single thread. Still, given Saudi clout in the market - the country holds most of the world's spare capacity - the Kingdom's output policy is central to the course of prices.
"If you're an American and counting on the Saudis to bring the price down, you're counting on the wrong horse," said an oil analyst who spoke on the condition of anonymity, citing his company's sensitivity in dealing with the Saudis.
The Saudis and OPEC have come under steady criticism from many in Congress for production restraint policies that are seen as fueling the continuing price rise. After campaigning in 2000 to "jawbone" OPEC into lowering oil prices, the Bush administration has shifted to seeing the Saudis as a reliable supplier of oil, while de-emphasizing prices and talking of using alternative fuels to limit oil imports down the road.
Crude oil prices have been pushed to nominal record highs by a host of factors on the supply and demand side. Soaring oil use in China and other developing countries came as geopolitical factors have disrupted output across the globe from Iraq to Nigeria to Venezuela at a time when there's little spare production capacity. An attempted terrorist attack on the world's largest oil processing facility in Saudi Arabia, and tensions over Iran's nuclear ambitions are keeping prices near $70 a barrel.
On the New York Mercantile Exchange, crude futures approached $74 Monday after Iran's supreme leader, Ayatollah Ali Khamenei warned that Iran would disrupt energy shipments from the Gulf should the country come under attack from the U.S. The U.S. and its allies are attempting to negotiate an arrangement with Iran which will prevent it from gaining the ability to produce nuclear weapons, while Tehran insists it only wants to develop nuclear power.
Ahead of the OPEC meeting, host Venezuela made hawkish comments that it wanted the group to cut output, even in the face of current high prices. While OPEC officially kept its output ceiling unchanged at 28 million b/d, the Saudis in cutting back have moved back to their assigned quota level.
Some analysts don't see Saudi Arabia revealing itself as a true price hawk with the singular move.
"The Saudis are not trying to cut (output) to bid up prices," said Yasser Elguindi, senior analyst at Medley Global Advisers in Philadelphia. "That's wholly absent from Saudi production policy now. There's no linkage whatsoever."
Supply To Rise With Refiner Demand
The Saudis "are having trouble moving product and are just not going to keep it out there on the market. They are reacting to things going on around them," Elguindi said, such as steep cutbacks in refinery operations in recent weeks. In early April, U.S. refiners processed their lowest volume of crude oil for that time of year since 1997.
Elguindi said it's "much more difficult today to get a handle" on the global oil market than ever before. That's because much of the growth in demand apparently is coming from countries such as China where data is often unreliable. And refiners want to hold more crude than ever before in a market with fairly tight spare production capacity.
Naimi told the Journal that the Saudis were having difficulty finding buyers for all of its grades of crude, not just harder-to-refine heavy crudes.
The newspaper quoted a senior Iranian oil official at the OPEC talks confirming that his country, the second-biggest producer in OPEC, was having trouble selling oil and was storing it, rather than selling it.
In the U.S., refiners are expected to sharply boost operations in coming weeks as the peak summer demand season for gasoline approaches. Medley's Elguindi believes that as U.S. refiners increase their appetite for crude, Saudi output will also rise.
"They'll be back at 9.4 to 9.5 (million b/d) in the not-too-distant future," he said.
Will we ever be allowed to find out?
Our "friends," the Saudis ......
This looks like more of a problem with lack of refining capacity. There's not enough refining capacity to process extra Saudi crude even if they produced more.
The OVERWHELMING majority of price flucuations are due to the FUTURES MARKET who keep responding to what WHACK-JOB in Iran threatening a total cut-off to retaliate against any action taken towards them.
But the extra Saudi production capacity does limit the upward trend in oil prices. Without their extra capacity, prices would be even higher right now. Iran is holding up the price right now. If there's a solution to the Iranian nuclear standoff, I think oil prices would drop $4-8 very quickly.
They can pump 100 million barrels a day out of ANWR. Who the hell is going to refine it?
Refinery Utilization and Capacity, 15 MMBPD, max capacity (not sustained) 17.4 MMBPD
Saudi Arabia knows, as does the United States, that it is not in the best interest of either country to do permanent damage to Saudi oil production. Saudi Arabia has stepped into the gap a number of times to help keep oil prices manageable - even allowing the US to see $1 per gallon as long as just 3 years ago.
But a country that produces only 1/3 of its oil needs will always be in trouble. The US could boast in World War II tremendous oil production to sustain a war effort against both Japan and Germany. And the US made sure to blow the Jap and German oil production (refineries) to bits a number of times in the war. Japan was really hurt when they had to put crude oil directly into battleships, cruisers and aircraft carriers. Some timely hits on these targets made some really nice fireworks in World War II.
So our stupid energy policies may hurt our US Navy, US Army, and Air Force in the long run...
This is something Saudi Arabia has to do so that they can eventually maintain much higher production levels.
The cost of oil reaching $6 a barrel here in the United States in 1986 shutdown a number of very small production facilities - so lowering the price of crude can hurt production.
It is a same that the environmental wackos have such powerful control of the US Senate. See for more poor people hurt by stupid DEMOCRATIC SENATORS concerned for slime worms and other eco nut policies... Also too much concern in the Lame Stream Media for wacko environmental policies designed to hurt poor people...
The Saudis need more cash to fund madrassas where they can indoctrinate kids into hating America and Israel.
I'd like to see the effort put into this:
http://www.unh.edu/p2/biodiesel/article_alge.html
that we put into landing on the moon.
The West Coast used to take 2 MMBPD of crude oil from Alaska. Now they take less than 1 MMBPD from Alaska and import 1.2 MMMBPD from foreign countries. Even if you subtract out Canada and Mexico, they still import more than 1 MMBPD from other nations. The largest importer to the West Coast is Saudi Arabia.
So private companies are going to lay out all this money to drill these wells and pump oil - and then they're going to sell it for less than the spot market value to the U.S. government? What happens when Saudi Arabia sees they're getting undercut and they decide to drop their production to match our increase, thus keeping prices right where they're at?
Good site. Thanks for the link. Looks good to me.
Maybe that is what you want. But petroleum is still the most cost effective fuel for the use we have. ANWR is only a piece of the future. It also includes NPRA, Bristol Bay, OCS, all our coastlines, oil shale, oil sands, methane hydrates, nuclear, coal and others. We could be energy independent. We just need to take control back from the environmentalists that hold our country hostage and fund foreign governments.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.