Oil price falls on Saudis' threat to raise production

OIL prices fell on world markets yesterday following reports that Saudi Arabia would defy its Opec partners and start pumping an extra million barrels a day.

Industry sources said the kingdom was in talks to ship more crude to Asian refiners, after failing at a meeting on Wednesday to persuade other Opec members to join it in raising production.

Middle East energy analyst Sam Ciszuk at IHS, said the kingdom was asserting its authority to the Opec cartel, by showing it was not bluffing.

"The Saudi intention is to show that they cannot be pushed around," he said. "Either Opec follows the Saudi lead or they will have problems."

A proposal by Saudi and its Gulf Arab allies the UAE and Kuwait to lift Opec production was blocked by seven producers, including Iran, Venezuela and Algeria.

The two sides blamed each other for the breakdown in talks, with Iran's Opec governor Mohammad Ali Khatibi saying Riyadh had been overly influenced by US-led consumer country demands for cheaper fuel.

"The hawks in Opec called their bluff and now it is up to Riyadh to show that they were not bluffing - that they will go ahead unilaterally if pushed," said Cizsuk.

The situation has left Opec members free of a quota for the first time in more than a decade.

But Ian Armstrong, oil expert at Brewin Dolphin, said rumours of Opec's demise were exaggerated, with the cartel likely to return to business as usual next time it meets.

He said that while Iran and Venezuela were usually opposed to any move to bring down oil prices, it was "interesting" that those in the middle ground didn't agree with the Saudis, suggesting they may not have thought upping production would bring down the price.

He said current prices were keeping global demand for oil in check.

The concern for producers was that a further spike in oil prices would drive consumer nations to invest faster in alternative energy sources.

However, he said the price of Brent crude was likely to stay "well above" $100 a barrel for the foreseeable future.

"I can't see it going below that any time soon, unless we have a double dip recession," he said.

"There are still question marks as to just how big the Saudi Arabian reserves are, and the cost (of extracting oil] just keeps on rising."

The news that Saudi Arabia will boost output coincided with an Opec report that world demand for its oil was outstripping the present supply.

The monthly demand forecast estimated Opec crude production last month averaged 28.97 million barrels, while demand this year is expected to average a daily 29.9 million barrels.

World oil demand is expected to outpace supplies later this year by the widest margin since 2007.The kingdom, which in recent times has acted to avoid spikes in the price of oil, is likely to act alongside its allies to make up the shortfall.

Royal Bank of Scotland yesterday raised its forecasts for average oil prices in 2011 and beyond, although analysts said they still thought Brent would trend down in the second half of this year, partly as a result of the Saudi action.

RBS raised its forecast for the average price of Brent crude in 2011 by $13 to $107 a barrel, predicting the price might fall below $100 around the end of the year.

The bank said: "Even if disruptions to output from Libya and Yemen prove prolonged, inventories appear plentiful and Saudi Arabia seems committed to lower price levels. Also, evidence of what may prove to be demand destruction is beginning to emerge."

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