RIYADH, Saudi Arabia In a signiﬁcant shift, Saudi Arabias oil minister said yesterday 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 Saudi oil 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 US crude oil 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 OPECs 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 already producing well over their quotas. Its going to change the quotas more than its going to change production, said analyst Adam Sieminski of Deutsche Bank in London.
OPEC pumps about one-third of the worlds oil, and Saudi Arabia is its biggest producer and de facto leader.
Crude oil prices brieﬂy plunged after the announcement. Contracts of US light, sweet crude for June delivery fell by $1.65 a barrel on the New York Mercantile Exchange before recovering to $38.93 a barrel, down $1. 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 US gasoline prices and help President Bush win re-election. Saudi and US ofﬁcials denied the report.
Analyst Jan Stuart of FIMAT USA, a New York brokerage, said the Saudi decision was very curious. Its diametrically opposite to everything Naimi has been saying" about supplies being adequate to meet demand, he said.
OPEC 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.
At their March meeting in Vienna, OPEC members decided to cut production by 1 million barrels a day, despite warnings by analysts that oil prices would surge. Kuwaits energy minister, Sheik Ahmed Fahd Al Ahmed Al Sabah, praised Naimis new position, saying it justiﬁed Kuwaits opposition to the March cut.
Naimi said he would discuss the market situation with other OPEC members May 22-24 at the International Energy Forum in Amsterdam. OPECs June meeting will be held in Beirut.
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 markets 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.
The average retail price of gasoline in the United States is $1.89 per gallon, according to AAA.