Oil price sinks as Saudi vows extra supply
By Duncan Shiels
LONDON, July 4 (Reuters) - Oil prices tumbled on Tuesday as dealers took seriously a Saudi pledge to raise crude output within the next few days despite not having yet secured the support of its fellow members of oil cartel OPEC.
A surprise statement from Saudi Oil Minister Ali al-Naimi late on Monday revealed that Riyadh was planning to raise exports again just days after a second OPEC production increase this year.
London Brent blend futures plunged more than $1.50 to settle at $29.58 a barrel. Prices still have much further to fall to reach OPEC's target of $25. The U.S. market was closed for the Fourth of July holiday and all eyes will be on its reopening on Wednesday.
A note of discord was sounded by fellow OPEC member Venezuela, the world's third largest oil exporter, whose President Hugo Chavez said the country would not increase its production to help Saudi Arabia lower international prices.
Chavez said he had spoken to Saudi Arabia's King Fahd earlier Tuesday, and reminded him of their duty to bolster the Organisation of Petroleum Exporting Countries (OPEC).
``There is pressure for us to increase production so that prices fall. No, we are not going to do that,'' said Chavez. ``We have to strengthen OPEC.''
Venezuelan Energy and Mines Minister Ali Rodriguez, who is currently OPEC president, said he would speak with his Saudi Arabian counterpart later on Tuesday to discuss the plan.
SAUDI MAY GO IT ALONE
But market analysts said there was evidence that Saudi Arabia may brush aside such opposition and was prepared to go it alone to bring prices down, something sure to hit the oil market hard.
``Judging by the astounded reaction from other OPEC members it is a unilateral move which stamps Saudi Arabia's authority on the world oil market,'' said Lawrence Eagles of brokers GNI.
The Saudi initiative comes 10 days after OPEC agreed on a modest 708,000 bpd supply increment that failed to push prices down to the $25-a-barrel comfort zone that satisfies both producers and major petroleum importers like the United States.
``If the price does not decrease, Saudi Arabia, in conjunction with other producers, will increase production by 500,000 bpd within the next few days,'' Saudi Oil Minister Ali Naimi said in an interview with the official Saudi Press Agency.
While others in OPEC put on a brave face, saying they would consult with Saudi Arabia ahead of any new output move, Riyadh was not expected to wait long before delivering on its promise.
An OPEC insider said that the kingdom would move unilaterally if others in the Organisation of the Petroleum Exporting Countries could not respond.
``The door is wide open, every possibility is there to bring the price down from current levels to nearer to $25,'' the OPEC insider said.
Riyadh controls more than two million barrels a day of spare capacity that can be brought onstream immediately. Only Kuwait and the United Arab Emirates in OPEC and non-OPEC Mexico can also squeeze out a few extra barrels.
OTHERS IN OPEC STUNNED
Saudi Arabia's fellow OPEC producers were left stunned by the move. Along with Venezuela, big cartel producers Kuwait and Iran said they had been given no forewarning of the Saudi announcement.
Iranian Oil Minister Bijan Zanganeh said he had been assured by Saudi Oil Minister Naimi that Riyadh would continue to work within the framework of OPEC.
``Any decision on oil output hike will be on the basis of OPEC's decisions and understandings among all OPEC members,'' said Zanganeh.
``I have no knowledge about this issue,'' said Kuwaiti Oil Minister Sheikh Saud Nasser al-Sabah. ``This requires consultation with other producing countries.''
Rodriguez denied that the surprise move threatened the unity of OPEC.
``I have not yet had any contact with Naimi,'' Rodriguez told reporters. ``I will be calling him later.''
By contrast, Saudi's non-OPEC ally Mexico and Washington appeared both to be in the loop. A Mexican official said his country had been made aware of the Saudi move and had the capacity to raise production if necessary.
Mexican President-elect Vicente Fox said he would continue cooperation with other oil producers and follow the current government's line to ensure oil prices were not so high as to damage the economies of Mexico's trading partners.
``It is certainly in Mexico's interest and it is an interest of mine to be close to the oil producers, there's no doubt in that,'' he told a news conference.
``We need to be careful not to drive oil prices too high because we would be paying the price ourselves.''
Mexico sends about 90 percent of its exports to the United States.
U.S. Vice President Al Gore quickly offered his congratulations and called on U.S. oil companies to pass any price cuts through to consumers at the petrol pump.
OPEC has been under pressure to help curb high retail gasoline prices in the West and curb concerns that rising energy import costs could force central banks to push up interest rates.
OPEC on June 21 agreed to lift supplies by 708,000 bpd to 25.4 million bpd, topping up a 1.7 million bpd increase in March.
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