Saudi Arabia Pledges to Provide Extra Oil

on Sep 20, 2012

Saudi Arabia, the world’s biggest exporter of crude oil, has offered its major customers in Europe, Asia and the US some extra oil supplies with the intention of bringing down the continuously rising crude oil prices. The announcement is nothing short of surprising given the cold reply Riyadh had given the G7 finance ministers twelve days ago, when they asked oil exporters around the world to expand production.

Despite Saudi Arabia’s claim that supply and demand in the market are balanced, the country has carried out discussions with large refiners, offering them extra oil. Riyadh is now evaluating their responses, trying to figure out by how much it can expand its oil exports. In August the nation produced 9.9 million barrels per day (bpd), while in September it once again reached top production levels of 10 million bpd. “We are consulting our clients about their oil needs and telling them we are ready to supply more,” reassured a senior official.

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!m[](/uploads/story/423/thumbs/pic1_inline.png)According to OPEC representatives, Saudi Arabia has the capability and practically is managing crude oil prices in the world. When prices plunged to $90 in the beginning of the summer, the Saudis lowered their supply and brought them back up. Now with crude oil prices having crossed the $115 border, Riyadh will increase supply. Developed economies in distress, emerging economies, poor countries, even oil suppliers and the energy sector all lose from higher oil prices. They are especially problematic for President Barack Obama, who has been repeatedly blamed by Mitt Romney’s campaign for the relatively high prices Americans pay at gas stations to fill up their cars.

Partly because of these political attacks, last month the White House brought back to the table the option of releasing a part of the US’ strategic petroleum reserves (SPR). As of this week, there is no authorization by President Obama, who is not willing to provoke confrontation with countries opposing a SPR release such as Germany, Italy, Japan and South Korea.

Investors remain cautious, especially with Monday’s mysterious plunge in prices by $4 a barrel, which lasted for four-minutes. According to Brison Bickerton, strategist at Freepoint Commodities, the fall suggested “a large trade crossing a market unprepared to deal with that much volume.” It is likely that someone holding large stakes decided to get rid of them at once pulling the market price considerably down and scaring market participants. With Saudi Arabia’s pledge to meet demand and expand its production, the possibility of SPRs diminished but crude oil price continues to decline reaching $110.50 on Wednesday.

Geopolitical issues additionally exacerbate the crude oil situation as Israel and Iran edge closer and closer to the serious possibility of a full-blown military conflict. Israeli Prime Minister Benjamin Netanyahu appeared on two different talk shows on Sunday and claimed that Iran’s nuclear program is six or seven months away from completion. The US has already imposed sanctions on Iran which slashed its crude exports to around 1 million bpd from approximately 2.4 million bpd last year. For now, Saudi Arabia is picking up the slack despite Iran’s warning not to increase crude oil production, which will help offset the impact of US and EU sanctions.


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