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The oil price that launched a wall of ships

The super tanker Kometik: In a matter of days last week, Saudi Arabia hired the largest number of super tankers it has assembled in years.

Greg Locke/Reuters/Greg Locke/Reuters

For the traditionally dull oil shipping market, the events of the last week have come as a shock.

In a matter of days, Saudi Arabia has hired the largest number of super tankers in years. When the tankers load their cargo in Ras Tanura, the world's largest oil terminal, in the next couple of weeks and start a 40-day voyage toward the U.S. Gulf coast, they will deliver a wall of oil with a single aim: to bring prices down.

"This is the first time in several years for [Saudi Arabia]to hit the market with such volume – and in such a short time frame," says Omar Nokta, a shipping expert at specialist investment bank Dalham Rose & Co.

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Last week, Vela, the shipping arm of Saudi Aramco, hired over a few days 11 so-called very large crude oil carriers, each capable of shipping two million barrels, to deliver to U.S.-based refiners. "In 2011, Vela fixed one VLCC to the U.S. every other month," Mr. Nokta said.

The hiring spree was the most public move by the kingdom in a series of efforts aimed at bringing down oil prices from $125 (U.S.) a barrel toward $100. "They want to bring prices down. That is it," a former Western oil official said.

The steps by the world's largest oil producer, which include tapping new oil fields and boosting its production to the highest level in 30 years, will surely be welcomed by the White House as it battles the negative impact of rapidly rising fuel prices.

U.S. President Barack Obama is battling accusations by Republican rivals who have been using rising gasoline prices to hammer him on his energy policies. The U.S. average price for regular gas at the pump last week hit $3.84 a gallon on Monday, according to American Automobile Association. It was just below the all-time high of $4.11 a gallon set in July, 2008.

The rally in gas prices comes as crude oil prices surged earlier this month to a post-2008 crisis high of $128.40 a barrel and set a record high in a number of currencies, including the euro and the sterling. Christine Lagarde, managing director at the International Monetary Fund, warned on Sunday that "the rising price of oil is a new threat that could derail the recovery."

Oil prices have surged on a combination of stronger-than-expected demand in Asia, supply disruptions in countries from South Sudan to Colombia and the impact of the forthcoming U.S. and European sanctions on Iranian oil exports.

The rally has brought back the memories of the 2008 surge in oil prices, when Riyadh was unable to lower prices even as it increased production. It watched from the sidelines as Brent crude soared from $100 at the beginning of that year to a peak of nearly $150 a barrel by July.

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Saudi Arabia and its partners at the Gulf Co-operation Council – which include Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman want to avoid a repetition of the runaway rally of three years ago. "Something must be done to damp market sentiment," a Gulf official familiar with the current oil talks.

Although the kingdom has stayed mum in public, the position of Riyadh could become clearer later this week during a meeting of oil ministers of the GCC in Doha, the Qatari capital. Besides the super-tanker hiring spree, the kingdom has already taken some other measures.

Riyadh appears to be storing crude oil in overseas locations in anticipation of a surge in demand for Saudi oil later this year, according to the International Energy Agency. The kingdom used the same storage tactic last year to deal with the supply shortage created by the civil war in Libya, officials said. The kingdom holds stocks in Rotterdam (the Netherlands), Sidi Kerir (Egypt) and Okinawa (Japan).

Riyadh is also taking out of mothballs oil fields that were shut down three decades ago, in an effort to maintain a big cushion of spare production capacity. The moves to boost production capacity are not an immediate response to short-term oil prices, but part of a longer term strategy to maintain a large buffer of spare production capacity, according to industry officials familiar with Saudi thinking. Nonetheless, the moves to bring more oil fields into stream would be welcome by the market which is keeping a watchful eye on Saudi Arabia's total production capacity.

Saudi Aramco plans to bring into production Dammam, the field that produced the kingdom's first oil in 1938 until it was mothballed in 1980. The state-owned company has already fast-tracked the development of the giant Manifa oil field.

Riyadh is using more drilling rigs this year than it has for any time in the past four years, in its effort to boost its production capacity, according to estimates by Baker Hughes, a leading oil services company that publishes benchmark estimates of drill use worldwide.

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Baker Hughes put the rig count in the kingdom at 77 in January, up 30 per cent from a low point of 59 a year ago and near the all-time high of 79 rigs set in late 2007 and early 2008 when oil prices surged toward a record high.

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