Oil Markets May Be Set For a Bumpy Ride...
July 5, 2000
Business and Finance - Europe
Saudi Arabia's Move to Raise
Oil Output Meets Resistance
By DANIEL PEARL and BHUSHAN BAHREE
Staff Reporters of THE WALL STREET JOURNAL
PARIS -- Oil markets may be set for a bumpy ride: Saudi Arabia's sudden decision to increase production by 500,000 barrels a day is part of a policy struggle within the world's leading oil-producing nation, and some Saudi-watchers think the internal debate still hasn't been resolved.
The kingdom's foreign minister, Prince Saud al Faisal, who is well-liked by Western politicians and Saudi elites, has the upper hand for now. Prince Saud, worried about a possible backlash from oil-consuming nations against $30-a-barrel prices, has pushed in recent weeks for stronger action to push prices toward $25 (26.33 euros), and was able to win approval for an output increase, officials familiar with Saudi deliberations say.
But the move still faces some resistance within the Saudi oil ministry, which also sees oil prices as too high but believes the market already has enough crude. In announcing the possible output increase Monday, oil minister Ali Naimi couched it in conditions, saying Saudi Arabia would act "in consultation with other producers" if prices don't drop. Oil ministers of Kuwait and Iran, taken by surprise by the Saudi announcement Monday, said Tuesday that Mr. Naimi had assured them in telephone conversations that Saudi Arabia would consult with the Organization of Petroleum Exporting Countries.
"They are to-ing and fro-ing, and for the moment, those who favor the longer-term perspective are calling the shots," says Leo Drollas, deputy director at London's Centre for Global Energy Studies.
Question of Policy Differences
One Saudi official Tuesday denied that there were any policy differences, noting that Crown Prince Abdullah bin Abdulaziz, the effective ruler, had decided on the policy.
Oil traders took the Saudi declaration seriously, with London's Brent blend futures dropping more than $1.50 to $29.50 a barrel. Market expectations may force Saudi Arabia to follow through with production increases, though some experts believe the Saudi oil ministry will argue for putting the production increase on hold if prices continue to drop in coming days. Saudi Arabia's OPEC partners Tuesday insisted they be consulted before any output increase, though almost none of them have unused oil production capacity.
"We're in for a very volatile market," says Mehdi Varzi, head of oil research at Dresdner Kleinwort Benson in London. "This is the first sign of possible friction in OPEC since March 1999."
1Saudi Arabia Might Pump More Oil to Cool Hot Market (July 4)
Need for Sweet, Not Sour Crude
By most accounts, the market is well-supplied with crude already, and producers of "sour" -- that is, high-sulfur -- oil are already having to offer widening discounts to buyers. Saudi crude is mostly sour, and pumping more will lower the price of such grades. But that will do little if anything to solve the gasoline-price problem in the U.S., where refineries need sweet, or low-sulfur crudes. It could, though, help forestall a run-up that began last week in U.S. heating-oil prices.
U.S. pressure has continued on Saudi Arabia to help lower prices, although the discussions have become more private, as the Saudis prefer. Top Saudi officials are said to be concerned they could be accused of trying to influence U.S. elections in November in favor of Republicans. Crown Prince Abdullah "wants to look cooperative, to sound as if he is somebody responsible," says one Gulf official, adding that there have been growing concerns about an election-year move by American politicians to take radical measures to drive down prices.
Saudi Arabia's push to force a production increase has its own risks. Some OPEC-country officials say Saudi officials have acknowledged the country is taking on its old role of "swing producer" -- responsible for putting extra oil on the market when needed, but also responsible for reducing oil production if the prices drop too far. Saudi oil officials have shunned that role since the 1980s, when other countries grabbed market share as Saudis cut back. That is less of a danger now, since no other country has extra capacity on the scale of Saudi Arabia. But if prices dip sharply Saudi Arabia could be forced to pull back more than 500,000 barrels to correct them.
Acting Further
Saudi Arabia had pressed for a production increase of one million barrels a day during OPEC's June 21 meeting in Vienna. But Mr. Naimi, facing opposition from others in OPEC, could only deliver an agreement to raise the group's output by 708,000 barrels a day. Prince Saud's camp accepted that, but resolved to act further if prices didn't fall sharply, says Nawaf Obaid, author of a book on oil policymaking in Saudi Arabia. Instead of dropping, prices actually rose.
"The oil ministry is pretty much out of the decision-making process," says Mr. Obaid. "All the decision making is beginning with the foreign minister."
Prince Saud, known as one of the brightest of the second generation of princes in Saudi Arabia, was a deputy oil minister in the early 1970s. As foreign minister, he at first had little power -- some of the most sensitive diplomatic issues were outside his portfolio. But with the emergence of his uncle, Crown Prince Abdullah, as Saudi Arabia's effective ruler, Prince Saud's advice was soon being sought on the country's most sensitive issues, including how to invite foreign oil companies back into Saudi Arabia.
Gulf officials said Prince Abdullah personally ordered the production-increase announcement, though it is unclear how definite an announcement he sought.
Write to Daniel Pearl at danny.pearl@wsj.com2 and Bhushan Bahree at bhushan.bahree@wsj.com3
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