G7 Raises Oil Supply Concerns, Saudi Arabia Burns Them Down

on Sep 13, 2012
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Saudi Arabia, the world’s largest oil producer and exporter, has reacted coolly to the G7’s request to expand production in order to counter and push down rallying prices. Two weeks ago, the Group of Seven finance ministers expressed their concerns about the significant jump in oil prices since June.

Reported on September 12th, Ali Naimi, the Saudi oil minister, assured that the kingdom shared G7’s worries but also explicitly pointed out that the current oil price is “is simply not supported by market fundamentals”, meaning an increase in supply in no way will guarantee lower prices. “The market is well-balanced, forward-cover remains within an acceptable range and inventories are more than adequate,” said Mr Naimi in a statement not directly referring to the G7 but clearly responding to their concerns.

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Mr Naimi also reiterated Saudi Arabia’s usual stance of always being ready to meet additional demand and vouched that all necessary steps will be taken to ensure satisfying levels of global supply. This year the country raised its production to a 30-year high of some 10 million barrels a day to offset the loss of sanctions-hit Iranian petroleum exports.

!m[](/uploads/story/357/thumbs/pic1_inline.png)In July, the Obama administration unleashed a new wave of sanctions against the state of Iran, including elaborate financial restrictions, with the apparent purpose of crippling Iran’s economy and forcing it back to the discussion table. “We will continue to ratchet up the pressure so long as Iran refuses to address the international community’s well-founded concerns about its nuclear programme,” said David Cohen, US undersecretary for terrorism and financial intelligence. The sanctions turned out to be surprisingly effective with Iranian oil production falling to 2.9 million barrels, the lowest level in more than 20 years.

The announcement of sanctions against Iran gave a hard kick to oil prices tipping them over the psychological barrier of $100 a barrel. Since mid-June, crude oil prices have rallied around 30 percent and recently reached $115 a barrel. On 10 September, global benchmark Brent crude was trading at $114.37 and US benchmark West Texas Intermediate was at $96.

President Barack Obama, having come under heavy barrage of Republican accusations in relation to the rising oil prices, is one of the main beneficiaries of G7 interventions in the oil supply. Jay Carney,
President Obama’s press secretary, was asked in late August whether the White House is considering releasing oil from the US strategic supply, to which Mr Carney replied that “all options are on the table, including that one.” Although releasing oil from strategic resources is the policy makers’ most powerful tool, most of them are reluctant to do so in light of the increasing risk of Iranian confrontation, which could provoke dangerous oil shortages.
According to the US Energy Information Administration (EIA), oil demand this year will rise by 0.84 million barrels per day (bpd), an adjustment of 84,000 barrels more from last month’s estimate. In 2013, global oil demand is forecasted to rise an additional 1 million bpd to some 90.1 million bpd.
If high crude prices linger, consumers will be left struggling with less disposable income, an extremely detrimental outcome for an already anaemic global economy.

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