Saudi Arabia to Promote Drop in Oil Prices – British Expert

Azerbaijan, Baku, 17 June / Trend corr A. Badalova/ Increase in Saudi Arabia's oil supply in July will have a stronger impact on drop in the oil prices - according to an international economist Hugo Navarro of Capital Economics Ltd, an independent macroeconomic research consultancy based in London.

On 15 June, the UN Secretary General Ban Ki-moon said at a meeting with the Saudi Arabian Minister of Petroleum and Mineral Resources Ali al-Naimi that Saudi Arabia would enhance oil production in June by 200,000 bpd to 9.7mln bpd. Saudi Arabia will announce its decision at the summit of main oil producers and consumers on 22 June, which will discuss causes and solutions of high oil price.       

Previously OPEC stated that it was not going to increase oil production until September 2008, as there is no need of that, while high oil prices is not a shortage but speculations in the oil market and weak dollar.

Navarro said to Trend on 17 June that Saudi Arabia's decision should have impact on prices for two reasons.

"First, production increase would come at the same time as the completion of the development of the Khursaniyah oil field, which will boost the country's total production capacity by half a million barrels per day," Navarro said. Presently the country produces 9.45mln barrels per day.

"This means that output could be increased by up to 500,000 bpd without reducing spare capacity," Navarro said.

According to Navarro, low levels of spare capacity (i.e. the difference between what the industry could produce and its actual output) has been a key factor in rising oil prices by raising concerns that output could not be maintained in the event of a supply disruption.    

"Second, the new supply of crude would be of higher quality - specifically it would be the same type of high quality crude that is most sought after by the market," economist said.

"Demand and supply conditions are tight for specific products, such as diesel, that are more easily produced from high quality crudes. As a result, the prices of these crudes have jumped while for the many, lower quality crudes that make up most of Saudi spare capacity, prices have been falling relative to their benchmarks," he said.

After Saudi Arabia announced an increase in oil production, the oil prices dropped a little. Cost of July futures for American WTI light oil at New-York Exchange NYMEХ dropped by $0.25 to $134.61 per barrel. Cost of July futures for Brent at London Exchange IСE dropped by $0.40 to $134.71 per barrel.

According to Navarro, Saudi Arabia will announce an increase in the supply of high quality oil of around 250,000 bpd instead of announced 200,000 bpd.

"At the least, this should help prices moderate slightly in the short term. But any substantial fall in prices will likely not happen until that additional output starts to show up in building inventories, and the dollar manages a more meaningful recovery. That could still take months, although we continue to expect oil prices to fall sharply (to $100 or so) towards the end of the year," Navarro said.

The correspondent can be contacted at [email protected]

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