CGES: Saudis cut output to lift crude price

Bob Tippee
Editor

Saudi Arabia has been limiting production to raise oil prices while blaming the effects on speculation and US refining problems, a London think-tank says.

"Saudi Arabia has been hugely successful in its attempt to raise oil prices," reports the Centre for Global Energy Studies (CGES) in its September-October Market Watch. "For the kingdom to claim that high oil prices are largely due to speculation or refining problems is disingenuous."

In the first quarter of 2006, the group estimates, Saudi Arabia produced more than 9.5 million b/d of crude, above the quota assigned it by the Organization of Petroleum Exporting Countries. The OPEC basket crude price at the time was $58/bbl.

Apparently, that wasn't high enough.

The kingdom autonomously trimmed production by 360,000 b/d in April 2006 and by 150,000 b/d in May. By the following October, Saudi production had fallen by 640,000 b/d.

The OPEC basket price jumped to almost $70/bbl in July-August 2006. After OPEC announced production cuts late in 2006 and early in 2007, Saudi Arabia further trimmed output from 8.89 million b/d in November 2006 to a low of 8.53 million b/d the next April.

"There can be but one explanation," CGES says. "Saudi Arabia was determined to get the OPEC basket price back up above $60/bbl, which was achieved in April this year, and the price has not dropped below this threshold ever since."

To effect the output cuts, the kingdom lowered the discount offered on its heavy crude. The differential on Saudi Heavy bound for the US Gulf Coast fell from $14/bbl in January 2006 to a low of $6/bbl last May, CGES says. The shrunken discount against benchmark crude discouraged purchases of the low-quality oil.

Since May, the discount has risen to $10/bbl, and Saudi production has increased by an estimated 280,000 b/d.

CGES thinks Saudi Arabia didn't expect the OPEC basket price to climb, as it did, above $75/bbl.

"That the oil price rose so high attests to the dangers inherent in manipulating output to bring about what are intended to be relatively modest changes in the price of oil," it says.

(Online Oct. 12, 2007; author's e-mail: bobt@ogjonline.com)

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