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Oil price edges closer to $140 a barrel

Times Online
The Times
June 17, 2008

Oil price edges closer to $140 a barrel

Oil prices surged to a record high of nearly $140 a barrel yesterday as traders brushed aside a decision by Saudi Arabia to start pumping crude at its fastest rate since 1981.

The latest rally in the price of a barrel of light sweet crude oil for July delivery to a record $139.89 on New York’s Nymex exchange came as the energy ministers of Britain and the United States welcomed Saudi Arabia’s decision to increase production by 200,000 barrels per day.

The increase in production comes ahead of an energy summit of producer and consumer countries in Jeddah this weekend, which Gordon Brown plans to attend.

Market experts said that the increase was not large enough to have a significant impact on the physical market for oil, amid continued robust global demand, particularly from developing countries. The extra Saudi oil was likely to be relatively low-grade “sour crude” rather than the lighter grades that are most in demand from refiners.

Richard Savage, head of energy research for Mirabaud, the Swiss bank, said: “This increase won’t help bring prices down. If anything, it has made people slightly nervous because the rise is so small that it makes you wonder how close to capacity the Saudis now are. There is a sense of: ‘Is this all they can really do?’”

Barclays Capital said in a research note: “The move does little to repeal the longer-term expectations for tight demand-supply balances.”

Mr Savage said that prices were likely to be brought down only by a reduction in demand, “especially if we see developing countries like China dismantling their subsidy regimes”.

Saudi Arabia’s increase, to be implemented next month, is expected to take its total daily production to about 9.7 million barrels with the new supplies expected to come from several of its big fields, including Ghawar, Shaybah and Katif.

The decision, which follows one in May to increase production by 300,000 barrels per day, will take the Kingdom’s output to its highest level since August 1981.

It reflects mounting concerns in many oil-producing countries that high oil prices threaten to destabilise the global economy, thereby undermining demand from consumer countries.

Saudi Arabia, easily the world’s largest producer of crude, in theory has maximum daily production capacity of 11.3 million barrels. Indeed, it plans to increase output to 12.5 million barrels next year by investing in several large new fields.

Nevertheless, the announcement is likely to trigger a fresh rift within Opec. Other Opec producers, including Venezuela and Iran, which lack the ability or desire to produce more crude, are likely to oppose the decision.

The Saudi decision to raise output ahead of the Jeddah summit appears to clash with comments made last week by Rafael Ramírez, the Venezuelan Energy Minister, who had said that no decision to raise production would be taken at the meeting.

Mr Savage said: “The Saudis are pragmatic enough to understand that, if prices move too high, you can kill the golden goose. Not everyone in Opec shares that view.”

Malcolm Wicks, the Energy Minister, and Samuel Bodman, the US Energy Secretary, welcomed the Saudi move. Mr Bodman said that the increase in production would be a “meaningful gesture”. Mr Wicks, speaking during a trip to Abu Dhabi, said that he hoped other producers would follow suit.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4151989.ece

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