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Oil’s Climb Defies Saudi Bid To Talk Prices Down

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Oil’s Climb Defies Saudi Bid To Talk Prices Down

July 7, 2008; Page C8

Oil markets are dealing a blow to Saudi Arabia’s efforts to calm prices with assurances of future supplies.

Benchmark crude prices set an intraday record near $146 a barrel Thursday in New York, a gain of more than $15 a barrel, or 11.5%, from an intraday low of $130.80 on June 10 after Saudi Arabia’s King Abdullah called for a hastily arranged producer-consumer summit. August light, sweet crude on the New York Mercantile Exchange settled Thursday at a record $145.29 a barrel, up $1.72.

[Crude-Oil Futures]

Oil prices whipsawed last month on optimistic trial balloons of Saudi output rising to 10 million barrels a day — a generational high — but the announcement coming out of the June 22 talks in Jeddah was that the short-term increases would take output to 9.7 million barrels a day in July. The production increase and a round of recent comments from Saudi officials have done little to take the steam out of rampaging oil prices, up over 50% this year so far.

The problem for Saudi Arabia and others trying to corral prices is that when the market focuses on the Middle East these days, it is with a nervous eye over increasingly tense Iran-Israel relations, not Saudi oil flows.

“For the moment, the market is still preoccupied with the question: How high can it go?” said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

Oil minister Ali Naimi has been on a media campaign, apparently aimed at persuading the market that long-term supply concerns are unfounded. “We can pump 11 million [barrels a day] sustainably for a long, long time,” he said, yet prices continued to climb.

Saudi Arabia is in the midst of an expansion plan to lift potential production capacity to 12.5 million barrels a day by 2009 from 11.4 million now. Mr. Naimi’s assertion that Saudi Arabia could potentially boost capacity even further after that, perhaps as high as 15 million barrels a day, appears to have fallen on equally deaf ears.

Oil prices are also finding support in the International Energy Agency’s near-term outlook projecting a tightening oil market in the next five years, with the Organization of Petroleum Exporting Countries holding “negligible” spare capacity and “minimal” non-OPEC supply growth by 2013. The IEA, the West’s energy watchdog, said current oil prices accurately reflect fundamental forces and cautioned that the economic downturn in the U.S. — the world’s largest oil consumer — will last at least until 2010.

While Saudi words flow and more barrels trickle to the market, traders will be watching to see if the kingdom acts to discount its oil, especially if prices keep marching higher. Such a bold pricing move by the Saudis, the world’s largest oil supplier, might blunt further price gains, but would likely cause upheaval within OPEC, where some countries already have been critical of the unilateral Saudi output rise.

“We are worried by the [oil] price,” Mr. Naimi said in Madrid last week, but wouldn’t address whether customers were reluctant to pay current high prices for the kingdom’s grade of heavy crude oil, which is more difficult to process.

“Saudi Arabia is ready to raise production if ‘needed,’ according to the kingdom’s oil minister … but the issue of marketability is skirted,” Harry Tchilingurian, oil analyst at BNP Paribas in London, said. “There is no indication that deeper discounts should be expected.”

The oil price gains have come despite distinct signs of falling demand in the U.S. Oil demand in the U.S. fell by nearly 400,000 barrels a day from a year earlier, to 20.342 million barrels a day in June, preliminary data from the Energy Information Administration show. That would be the weakest demand level for all of June since 2003.

–Hyun Young Lee contributed to this article.

Write to David Bird at [email protected]

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