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Saudi pledge fails to cool oil prices

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Saudi pledge fails to cool oil prices

By Chris Flood and Neil Dennis

Published: June 23 2008 09:38 | Last updated: June 23 2008 23:13

Oil prices rose on Monday as geopolitical tensions and concerns about disruptions to output in Nigeria overshadowed Saudi Arabia’s pledge to provide more crude supplies.

Nymex August West Texas Intermediate rose $1.38 to settle at $136.74 a barrel. ICE August Brent climbed $1.05 to close at $135.91 a barrel.

Saudi Arabia is to increase its crude oil output to 9.7m barrels a day from July, the highest level for almost 30 years. The world’s top oil producer plans to increase production to 12.5m b/d within 18 months and promised to pump more oil if required at a summit in Jeddah this weekend.

“But it appears all in vain,” said Robert Laughlin at MF Global. “No other producing country has seen fit to offer extra barrels [of oil] and we should be prepared for the market to react accordingly.”

In Nigeria, attacks by militants have cut oil output to 1.5m b/d, the lowest for 25 years, and well below its normal 2.5m b/d of capacity.

On Friday, Shell declared force majeure on delivery of 225,000 b/d from its Bonga offshore platform which was attacked on Thursday.

Adding further to upward pressure on oil prices were escalating tensions between Israel and Iran. Tehran warned of a “devastating” response to any attack in response to reports that Israel was carrying out a large-scale military exercise as a rehearsal for destroying Iranian nuclear facilities.

Any conflict between Iran and Israel would endanger oil supplies moving through the Strait of Hormuz, the strategic route through which about 20 per cent of global oil exports are transported.

The prospect of a supply increase by Saudi Arabia prompted speculators to reduce their bets for oil prices to rise. The latest data from the Commodity Futures Trading Commission showed the speculative net long position fell by almost half to 12,712 lots in the week ending June 10 when WTI reached $134.53.

Following China’s decision to raise domestic fuel prices by about 18 per cent last week, trade data underlined the strength of Chinese oil demand with crude imports up by 25 per cent in May against the same period last year. The data also showed that China became a net importer of gasoline for the first time last month.

“The announced increase in Chinese [fuel] prices will not depress Chinese demand growth to any significant degree,” said Giovanni Serio of Goldman Sachs: “On the contrary, it will likely help alleviate the shortages of refined products that are plaguing the country, supporting near-term crude demand from refineries.”

Gold fell sharply, down 2.4 per cent to $879.60 a troy ounce as dealers reported hedge funds liquidating long positions ahead of the Federal Reserve meeting on Wednesday.

The trigger was provided by the dollar strengthening against the euro following more evidence that the Eurozone economy is slowing with a disappointing reading from the German IFO survey and preliminary purchasing managers’ reports for June.

Australia’s gold production is expected to fall 7.8 per cent to 231 tonnes in the year to June 30, a sharper than expected decline, according to the Australian Bureau of Agricultural and Economic Resources. Australia is the world’s third largest gold producer and although a rebound in output to 256 tonnes is expected in 2008/09, traders warned that power supply problems could endanger this forecast.


In depth: Oil – Apr-29

Gideon Rachman: Begging the Saudis – Mar-31

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