May 21, 2008

Saudi Arabian oil minister Ali Naimi was quoted Wednesday as saying the sharp rise in crude oil prices was unexpected and undesirable for either producers and consumers but he blamed factors other than supply and demand fundamentals for record oil prices.

"There is no doubt that there has been a big rise in oil prices, which is unexpected and no desirable to the majority of producers and consumers," Naimi told the Saudi newspaper Asharq al-Awsat in an interview to coincide with the 75 anniversary of the discovery of first oil in Saudi Arabia.

But Naimi said the rally in oil prices, which on Wednesday for the first time broke through the $130/barrel mark for US light sweet crude oil futures, was not related to the fundamentals of supply and demand and stock levels but rather to five key factors.

He listed them as follows:

"Firstly, the sharp rise in the price of all basic commodities such as metals and agricultural goods as well as construction materials, gold, copper and others."

"Secondly, various disturbances in the financial markets as a result of the US subprime mortgage crisis, which had an impact on global financial markets and led to a weakening of the US dollar, as well as low interest rates on dollar deposits, all of which led investors, particularly in times of crisis, to turn to basic commodities as an investment tool, which contributed to the rise in oil prices."

"Thirdly, geopolitical tensions in some producing countries and fear that war might affect oil production."

"Fourthly, negative analyses concerning supply and production capacities which say that oil production has peaked and casting doubt as to the availability of additional production capacity. Despite the falsity of these allegations, they have created fear and panic in the markets, which in turn contributed to higher oil prices."

"The fifth factor is a rise in demand for refined products amid a sharp fall in refining capacity in consuming countries."

But Naimi would not be drawn on what he considered to be a fair price for oil, saying that it was a subject he tended to avoid because there was no such thing.

No fair price for oil

"There is no fair price for oil but there is an appropriate price for oil and this is based on fair returns for producing countries and oil companies, particularly in areas where production costs are relatively high," Naimi said, adding that an appropriate oil price is one that "does not harm the global economy and in particular that of developing countries, maintains crude oil's role as a primary source of energy and against alternative sources and one that guarantees suitable returns for the oil industry at all levels in order to maintain investment in this vital commodity."

Naimi, whose country is the world's biggest exporter of crude oil, said the kingdom's proven oil reserves stood at 264 billion barrels, which he said was a conservative figure. "What is more important is that we have been able over the last 20 years, through new discoveries and new technology, to replace what has been produced whereby we have been able to maintain our reserve figure and even add to it."

The Saudi minister, who is now serving his fourth term in office, said last week that the kingdom had raised its production by 300,000 b/d from May 10 in response to customer demands for additional oil. In June, Saudi Arabia would be producing 9.45 million b/d.

The figure would put Saudi production above its OPEC target of 8.943 million b/d and confirms the oil giant's role as unofficial swing producer, able to step in and use its spare production capacity to make up for any shortfall on global oil markets.

Naimi however made clear to US officials that Saudi Arabia would not increase production without specific requests from its lifters for extra crude oil. He explained at a news conference after Bush met King Abdullah that the extra Saudi crude made up for production losses in Nigeria and Mexico, both major suppliers of crude oil to the US market.

The surprise revelation of a Saudi Arabian production hike coincided with a visit to Riyadh by US President George Bush and a US request for more OPEC oil, does not involve any of OPEC's other 12 members, many of whom are believed to be producing at full capacity.

Saudi Arabia has put its current crude oil capacity at 11.3 million b/d with an additional 500,000 b/d due to come on stream later this year from the Khursaniyah oil field development.

Too early to say what OPEC will do

It was not immediately clear if the OPEC kingpin would seek a higher output target when the cartel's ministers meet in Vienna on September 9 and a Saudi source it was too early to predict the outcome of the ministerial gathering.

"It is too early to talk about what we are going to do in the September meeting. Al options are open. We will decide when we meet," the source said. "It all depends on what is happening in the market."

"Our policy in Saudi Arabia for almost a year now is to give our customers whatever they want, to satisfy their need, provided they ask for the right type of crude," the source said.

But he said the policy of OPEC kingpin Saudi Arabia over the past year had been to meet the needs of their customers without limit.

Saudi Arabia had ramped up production during the first two months of the year to above 9.2 million b/d and expected output to rise again in the third quarter in response to higher demand for its crude after a small dip in March, when second quarter demand was weaker, he said.

OPEC last met in Vienna March 5 and agreed to maintain a production target of 29.673 million b/d for the 12 members bound by production targets. The agreement excludes Iraq.

A Platts survey of OPEC and oil industry sources showed the OPEC-12 produced 29.49 million b/d in April, a fall of 360,000 b/d from March.