Saudi Arabia to boost production to force oil prices down

Jul 06, 2000 02:00 AM

Oil prices took a further plunge as the implications of Saudi Arabia's pledge to unilaterally raise production output by 500,000 bpd began to dawn on dealers. But the President of OPEC Ali Rodriguez denied the country's plan saying any decision to raise oil production would be taken by the group through consensus.
The Arab country and other members of OPEC had been under pressure from the United States to help ease retail fuel prices and curb concern that rising energy import costs could stoke inflation.
Despite the resolve of the other members not to yield to the pressure, Saudi Arabia announced plans to boost production with a view to forcing oil prices down to $ 25 per barrel. London Brent blend futures fell a dollar to $ 28.58 a barrel. It had slumped $ 1.52 after Saudi oil minister Ali al-Naimi announced his country's plan. US light crude was down by $ 2.21 a barrel at $ 30.30 in out-of-hours electronic trading as the US market reopened after a public holiday.

Fellow OPEC members were briefed by telephone, and even though some are resisting the plan, Saudi Arabia appears certain to pump more crude within days. Among OPEC's 11 members, the United Arab Emirates, Kuwait and Algeria looked likely to join Saudi Arabia in the overall 500,000 bpd increase, OPEC sources said, with Riyadh set to contribute the lion's share. "The Saudis were prepared to do the increase alone but always intended to do it in an OPEC context. With the support of these others, it is a certainty that will be announced in days, not weeks," a senior OPEC source said.
The participation of Algeria, though likely to contribute only 15,000-20,000 bpd, provides a fig leaf of cohesion.
Non-OPEC member Mexico also has spare capacity, and is considering whether it might crank out some additional barrels. Rodriguez, however, said a recent announcement of a unilateral output hike by Saudi Arabia was a misinterpretation.
"The OPEC Secretary General informed one that there was no idea by any country to raise output unitarily." Rodriguez, who is also Venezuela's Energy and Mines Minister, told : "We all continue to share what has been a longstanding practice in OPEC to take decisions unanimously and after consultation".
He added that recent comments by Saudi Arabia's Oil Minister Ahi-al-Naimi which appeared to indicate that the OPEC giant was prepared to go it alone with a 500,000 bpd increase, "was simply a journalistic interpretation. It was not what the Minister said." Nevertheless, Rodriguez said that "if the price stays above $ 28 (a barrel) for a long time, OPEC would take action." "Traders are waiting for confirmation that oil is being released," said Lawrence Eagles of brokerage GNI. "No one quite knows when this will be, but we would expect the decision to be finalised." Riyadh controls more than 2 mm bpd of mothballed capacity that can be brought onstream immediately, but most of its fellow OPEC members are already pumping at full stretch.

Venezuela, with no unused capacity to draw on, said it would not raise supply. "There is pressure for us to increase production so that prices fall. No, we are not going to do that," said Venezuelan's President Hugo Chavez.
Iran's said it believed OPEC's June 21 decision on output would be enough to bring prices down. Iranian representative Hossein Kazempour Ardebili told: "The current prices are not warranted by fundamentals. We are endeavouring to get prices down to the target of $ 25 as the impact of the 708,000 bpd increase is going to be witnessed." The Saudi Arabia move has pleased the United States, the world's largest oil consumer, which has been pressing OPEC all year to lower energy costs as the US nears its presidential election.

A hard-earned consensus on supply management in OPEC, which rescued oil prices from a heavy slump in 1998, is now in jeopardy. The Riyadh plan came just 10 days after OPEC agreed on a 708,000 bpd increment, raising cartel output to 25.4 mm bpd - about a third of the world's market of 76 mm bpd.
That failed to push prices downto the $ 25-a-barrel level that satisfies both producers and major petroleum importers. Saudi Arabia had asked OPEC to lift production by a mm bpd, but divisions within its camp and opposition from those in the cartel already producing at full capacity led to a compromise.
In March OPEC raised production by 1.7 mm bpd, to reverse one of three cartel supply cuts engineered in 1998 and 1999.

Source: AP via Newspage
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