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THE WALL STREET JOURNAL: Saudis Cite Market Forces For Lower Crude Output

Kingdom Denies Any Effort
To Curb Global Oil Supply;
Stores Are Near Capacity
By BHUSHAN BAHREE
June 5, 2006

CARACAS, Venezuela — Saudi Arabia’s oil minister confirmed that his country’s massive crude-oil output has declined in recent months, but he attributed the trend to a drop in demand and denied the kingdom is aiming to limit supply.

In an interview after a meeting here of the Organization of Petroleum Exporting Countries, Ali Naimi said other cartel members are having trouble finding buyers for all the crude they are producing, at a time when global stores are near full and many refiners have closed facilities for routine maintenance. One Saudi official said an estimated three million barrels a day of refining capacity is out of action and unable to process crude, at a time when the world is using some 84 million barrels a day of oil products like gasoline and jet fuel.
 
“It’s not just heavy oil. Even light oil is having problems” finding buyers, Mr. Naimi said, referring to premium grades of crude known as light crude that are highly prized by refiners because they have high gasoline yields.

Asked if the kingdom was easing up on supply because of concern about the buildup of inventories in the U.S. and other importing countries, Mr. Naimi rejected such a motive, replying: “At $70 a barrel?” Mr. Naimi suggested that producers will sell all the oil they can at such high prices.

The implication of Mr. Naimi’s remarks is that Saudi Arabia would again open its oil spigots when buyers ask for more oil. For the past two years, the Saudis say, their policy has been to sell as much oil as buyers want, to the limit of the kingdom’s production capacity.

U.S. benchmark crude for July delivery settled at $72.33 a barrel, up $1.99, on the New York Mercantile Exchange Friday. So far in 2006, crude oil is up $11.29 a barrel, or 18%, and the price has more than doubled since the end of 2003 due to rising global demand and supply constraints.

The Saudi minister said the kingdom’s oil output fell to 9.1 million barrels a day in April, the most recent figures available. Saudi output averaged nearly 9.5 million barrels a day in the first quarter, according to data compiled by the International Energy Agency.

The Saudi oil czar shrugged off concerns about large inventories, a trend that some in OPEC have cited as warranting a cutback in production. Mr. Naimi said producers must focus not only on stockpiles but also on spare oil-pumping capacity world-wide. Because there is little extra oil that exporters can produce, oil held in inventories can act as a cushion against supply disruptions.

But he ruled out the idea of Saudi Arabia discounting its oil to sell more barrels. “We will not leave money on the table” for others, Mr. Naimi said.

Saudi Arabia prices its oil according to a formula that takes into account prevailing prices on futures markets and on refinery margins — or the difference between the price of crude and the price of crude-based fuels — in different regions. It adjusts prices monthly for America, Europe and Asia. Many other exporting countries follow the kingdom’s lead. OPEC’s members assert that by basing prices on futures markets and on refining margins, they in effect let markets set the price of their oil.

With prices near a nominal high — though still shy of highs reached in the early 1980s when adjusted for inflation — OPEC’s ministers on Thursday brushed aside a proposal by Venezuela to trim output and decided to maintain current output quotas totaling 28 million barrels a day, excluding Iraq.

OPEC and industry officials say the cartel’s output is currently below that. In part that is because of supply shortfalls in Nigeria, whose production has been hobbled by political violence. But cartel officials say the production shortfall is also because Saudi Arabia and others in the cartel are encountering problems selling oil. Buyers have cut back purchases from other exporters, including Iran and the United Arab Emirates.

Iran’s response has been to keep pumping oil and storing it, some of it in tankers, while it looks for buyers on the spot market. Some industry estimates put the oil Iran has stored in the past six weeks or so at more than 20 million barrels.

A senior Iranian oil official attending the OPEC meeting confirmed that his country, OPEC’s second-largest oil producer after Saudi Arabia, was having trouble selling heavy oil and was storing it. But he didn’t specify the volumes involved.

In contrast, Saudi Arabia has reduced output to match demand for its crude. Saudi Arabia sells oil exclusively under long-term contracts with buyers that have some latitude in deciding how much crude to take every month at the prices specified by the kingdom. “We don’t sell on the spot market,” Mr. Naimi said.

Write to Bhushan Bahree at [email protected]

 

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