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Oil prices slump despite Saudi production cut

A Saudi oil plant: OPEC ministers insisted Monday that the global market is well-supplied with crude.


Saudi Arabia has dramatically shifted gears by cutting crude production, even as oil bounced around near 30-month highs, to guard against a sudden price slump caused by slowing global demand.

Despite the Saudi move, oil prices fell sharply on Monday as traders focused on the prospects of sputtering demand, given China's effort to curb inflation and new warnings about U.S. deficit problems.

Ministers from the Organization of Petroleum Exporting Countries insisted Monday that the global market is well-supplied with crude oil, and blamed political and market factors for the steep runup in crude prices this year.

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Saudi Arabia confirmed it has cut output by more than 800,000 barrels a day since mid-March, after it had boosted output by some 300,000 barrels daily to help settle markets after civil war broke out in Libya.

Oil Minister Ali al-Naimi cited weak demand for the cut in output, but said the kingdom would be prepared to open the spigots again if demand strengthens ahead of the summer driving season in Europe and North America when gasoline consumption typically peaks.

While lower Saudi production might be expected to trigger an increase in prices, traders apparently took the move as yet another signal that demand for oil is weakening. News of another interest rate hike in China and Standard & Poor's warning on the intractable nature of the U.S. deficit combined to drive down commodity prices across the board, including crude oil.

In New York on Monday, West Texas Intermediate - the benchmark U.S. crude - fell more than 2 per cent to $107.33 (U.S.), losing $2.33 a barrel. The leading global crude, North Sea Brent, fell $1.84 to $121.61 on London's ICE Futures Exchange.

However, one prominent forecasting group predicted prices could return to the peaks of 2008 - when crude briefly topped $145 a barrel - unless OPEC increases supply.

The Saudis appear to be erring on the side of caution by throttling back on production, fearful that too much supply would send prices sharply lower and cause further tension in an already divided cartel.

In a note on Monday, the Centre for Global Energy Studies - a London-based group founded by former Saudi oil minister Sheikh Ahmed Yamani - said the kingdom is overstating how well supplied the market is, given the loss of more than one million barrels per day of the Libyan light crude needed by European refiners.

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"If OPEC will not raise supply to balance the market, demand will have to come down eventually, which will only be achieved by a repeat of the record prices of 2008," the centre's analysts said.

"While the balance of fundamental factors driving oil prices upwards may differ from those in 2008, their net effect may be horribly similar."

OPEC ministers echoed concerns raised by the International Energy Agency that the spike in crude prices is causing a slowdown in demand growth. The IEA has also warned higher oil prices could even trigger another recession.

But the Saudis only cut back production after being unable to find customers for their additional output, said Greg Priddy, analyst with Eurasia Group, a Washington-based political risk consultancy.

"They don't really have a lot of takers right now," Mr. Priddy said. "As demand ramps up over the summer, they probably will. They're being a bit cautious but I don't think it's the case that they are trying to push prices up from $120."

While some observers note the Saudis have boosted domestic spending to ease social and political tensions in the country, Mr. Priddy said the kingdom can produce a balanced budget - even with the higher expenditures - at an oil price of $84 a barrel.

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