Saudi Arabia under pressure to cut output

Peg Mackey and Daniel Fineren Vienna

Saudi Arabia came under pressure yesterday from fellow Opec producers to cut oil output to prevent a further slide in crude prices.

Saudi Arabia's Oil Minister Ali al-Naimi refuses to talk to journalists as he waits for the OPEC International Seminar to begin in Vienna June 13, 2012. REUTERS/Heinz-Peter Bader (AUSTRIA - Tags: ENERGY POLITICS). Credit: REUTERS

Price hawks in the organisation of oil-producing countries are fretting that slowing economic growth will send crude, already off $30 (R253) since March, plummeting further.

“We think that given the economic situation, above all in Europe, there is a serious threat that prices might fall drastically and so our policy is to defend the production ceiling agreed in December of 30 million barrels a day,” Venezuelan Oil Minister Rafael Ramírez said.

“I am afraid of this fall, anything below $100 is very painful for Libya,” said Libyan Oil Minister Abdulrahman Ben Yazza.

Brent crude traded at just over $97 a barrel yesterday, having peaked this year at $128 in March.

Saudi Arabia, which has a moderate policy on oil prices, initially floated a proposal to lift Opec’s output target.

After Riyadh quickly dropped that idea, the 12-member group looks set to leave its formal production ceiling unchanged at 30 million barrels a day at a meeting today.

But extra Saudi oil boosted actual output to 31.6 million barrels a day in May, a production rate in excess of demand that is building world inventories rapidly.

A report from Opec estimated inventories rose by 2.1 million barrels a day on average in the first quarter of the year during a seasonal period when stocks normally decline. Supply and demand data suggest a stock build-up on a similar scale in the second quarter.

“In the face of such gloomy uncertainty Opec should be discussing production restraint (today),” David Hufton of London oil brokers PVM said.

Saudi Arabia, the world’s only major swing producer, finds itself in the tricky position of trying to plan cover for supplies lost from Iran when an EU oil embargo starts on July 1 without sending prices crashing.

Its preferred oil price is $100 a barrel, a price it feels permits oil investment without hurting economic growth, while most in Opec want to defend $100 as a price floor.

Additional Saudi supply, taking Riyadh to a 30-year high of 10 million barrels a day, has helped build oil stocks around the world.

In the US, where Saudi crude imports have risen sharply this year after years of decline, crude stocks are at their highest since 1990.

The stock cover will insure against further output losses from Iran, where the International Energy Agency estimates exports are already down by 40 percent, or by 1 million barrels daily, to 1.5 million barrels a day since the end of last year.

Asian importers of Iranian crude had been hoping that part of the EU embargo on Iran, on shipping insurance, might be delayed or cancelled to permit them to continue taking out UK indemnity to cover Iranian oil shipments.

But EU Energy Commissioner Günther Oettinger said yesterday the embargo would proceed as planned.

Those in Opec who fear a price slide could cite the group’s own in-house analysis from its Vienna secretariat, which suggests that prospects for oil demand are darkening. – Reuters