Saudis cutting output to keep oil price north of $50

Wall Street Journal - January 30, 2007

Saudis to Pare Oil Output Again

Amid Market Uncertainty, OPEC Leader to Remove 158,000 Barrels a Day

By BHUSHAN BAHREE

Saudi Arabia, which already has aggressively shaved its oil output in
a battle to shore up prices, is tightening its spigots further this
week.

A senior Saudi oil official said yesterday the kingdom had advised
its customers of the impending 158,000 barrel-a-day cut, which takes
effect Feb. 1. The reductions, part of a broader campaign by the
Organization of Petroleum Exporting Countries, are intended to shrink
inventories of oil that had ballooned last year as demand growth for
petroleum faltered.

“After these cuts, our oil production will have declined by about one
million barrels a day since last summer,” said the senior Saudi oil
official.

Word of the Saudi move to further trim output comes as traders are
trying to parse whether OPEC is going to cut its production in line
with its announced plans. OPEC’s members often produce more than they
have pledged. Saudi Arabia, the world’s largest oil exporter, is the
oil cartel’s de facto leader and closely watched by markets.

Saudi Arabia’s one-million-barrel reduction — made over a roughly
six-month period — is nearly double the total cuts it agreed to make
under two output reductions hammered out by OPEC at meetings in Doha,
Qatar, in October and in Abuja, Nigeria, in December. The Saudi
official couldn’t be precise about Saudi output after the reduction
this week but said that it would be “around 8.5 million barrels a day.”

The 10 members of OPEC that committed to reduce their output were
producing about 27.5 million barrels a day in September. The agreed- upon cuts, if fully implemented, would bring the group’s output down
to 25.8 million barrels a day in a global oil market of about 85
million barrels a day.

OPEC officials, including some senior Saudis, have been sending some
conflicting signals about their plans. Yesterday, U.S. benchmark
crude declined $1.41 to $54.01 a barrel after the outgoing Saudi
ambassador to the U.S., Prince Turki al Faisal, said current oil- price levels are “adequate to meet the requirements of producing and
consuming countries.” He also dismissed speculation that Saudi Arabia
was trying to drive down oil prices to constrain export revenues for
political rival Iran.

The ambassador sent crude prices down in October when he said the
kingdom’s aim was to bring oil prices down to “reasonable levels.”
This was shortly before OPEC ministers met and announced a 1.2
million barrel-a-day cut.

Saudi oil officials who manage the kingdom’s production say more cuts
are on the way. The move to trim further comes as the cartel seems to
be having some success in shoring up prices, which fell below $50 a
barrel amid signs of sluggish oil-demand growth and rising inventories.

Ali Naimi, Saudi Arabia’s oil minister and the cartel’s de facto
leader, has been careful not to pinpoint a specific target price for
crude. Analysts said the OPEC cuts are meant to shore up crude well
above $50 a barrel for the benchmark U.S. oil type by further eating
away at inventories.

“They are defending prices from falling below $55 [a barrel] quite
aggressively,” said Roger Diwan, an analyst at PFC Energy, a
Washington industry consultancy.

Mr. Diwan noted Saudi Arabia had opened its oil taps wide when prices
were surging, in line with its long-standing policy of tempering
markets. Saudi officials had expressed concern when prices soared to
record highs last year, for fear that the price surge might trigger a
market-killing economic downturn or encourage customers to seek
substitute fuels. “The Saudis, they don’t talk a lot, so look at what
they do, and that will give you the whole story,” Mr. Diwan said.

Saudi Arabia cranked its pumps to near-maximum in 2005, when prices
leaped because of strong demand, tight supplies and hurricane damage
to oil-production facilities in the Gulf of Mexico. Late last spring,
the kingdom began trimming its output as oil tanks in consumer
countries filled up and Saudi Arabia couldn’t find buyers for all its
oil.

During the summer, buyers demanded more oil, and the Saudis provided
it as world oil prices peaked at more than $77 a barrel in July. Then
prices started tumbling in the fall, prompting OPEC to cut output twice.

This month, as oil prices fell close to $50 a barrel in New York, Mr.
Naimi brushed aside calls by some members such as Venezuela and Iran
for an emergency OPEC meeting, presumably to consider deeper output
cuts than already agreed upon. A Saudi official said the kingdom
turned down a meeting because oil-industry data showed the
fundamentals of the oil market were moving toward balance and that no
cuts beyond those already planned were needed for the months ahead.

Since then, prices have firmed above $50.

—- Ian Talley contributed to this article.

Leave a Reply