| Saudi production increase has no effect { May 24 2004 } Original Source Link: (May no longer be active) http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1084907792148http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1084907792148
Oil price optimism proving premature By Scheherazade Daneshkhu in London, Anna Fifield in New York and Javier Blas in Amsterdam Published: May 24 2004 21:25 | Last Updated: May 24 2004 21:25 The world's leading economies were in high spirits on Monday in the belief that they had put the global recovery back on track but - as the markets showed on Monday night - such optimism is already proving premature.
Saudi Arabia's move to break from the ranks of the Organisation of Petroleum Exporting Countries and unilaterally increase crude production was cheered in the art deco corridors of the Waldorf Astoria hotel in New York. Finance ministers from the Group of Eight industrialised nations hailed it as "a step in the right direction" and are now leaning on other members of the cartel to follow suit.
But with both the capacity - and willingness - of oil producers to increase production in doubt, the mood of self-congratulation could be misplaced.
The West Texas Intermediate futures contract was almost $2 higher on Monday than on Friday, before the G8's call for more supply. "The market's view is that not enough has emerged to make a difference," said Kevin Norrish, oil analyst at Barclays capital.
Saudi Arabia has called for Opec to raise its production ceiling by up to 2.5m b/d from 23.5m b/d and claims that it can raise its own production from 8.3m b/d to 10.5m d/ b quickly.
But even if it can raise production to these levels, Mr Norrish says it is not a foregone conclusion that the kingdom will do so. So far, the signs are that Saudi Arabia believes that oil prices have been driven up by a combination of financial speculation, lack of refinery capacity in the US and fears of a oil sabotage in the Middle East rather than because of lack of crude oil.
As Manouchehr Takin, senior petroleum analyst at the London-based Centre for Global Energy Studies, says Opec ministers are still mindful of the consequence of their decision in 1997 to raise production, which led the oil price to halve in 1997-98.
He believes there is enough spare capacity within Opec to replenish low inventories and push prices back below $40 a barrel. But given the strength of demand, oil prices are likely to remain in the high $30s a barrel for another year or so, he said.
Mexico, one of the three main US oil suppliers, warned yesterday that high oil prices would become the norm because of a structural change in the market, namely increased demand from Asia, principally China.
"The market is signalling that the price band between $22 and $28 was broken a long time ago," Felipe Calderón, the Mexican energy minister, told Expansion, the FT's Spanish sister newspaper, in an interview on the sidelines of the International Energy Forum in Amsterdam.
Mexico is a key supplier to Washington. It exports 1.86mbd, but could increase this to 1.95mbd, its minister said.
Industry analysts stressed this would need time and more investment. Nevertheless, Mr Calderón said he expected a small, but significant build of inventories this year.
Mr Calderón said the current record oil prices were "a brake for global growth" and were likely to force Opec members to increase production at their meeting in Beirut next week. "Everything points to an effort from producing countries to increase the supply," he said.
With elections looming in the US and the UK, the G8 ministers' sternly worded communique could be regarded as just as political as it was economic.
The last thing John Snow, the US Treasury secretary, and Gordon Brown, the British chancellor of the exchequer, want is for growth to stall. "Lower oil prices would benefit the world economy," the statement said. "We now call on all oil producers to provide adequate supplies to ensure that world oil prices return to levels consistent with lasting global economic prosperity and stability."
This was significantly stronger than the statement issued at the finance ministers' meeting in Washington last month, when they merely cited energy prices as one potential risk to the global recovery.
"The importance of Saudi Arabia's move shouldn't be underestimated," Mr Brown, told journalists at the meeting.
Although Mr Brown characterised the communique as "tough", the ministers were also at pains not to offend other oil producers.
In that respect, especially given the split within Opec over the Saudi decision, Russia's support for the communique was significant.
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