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To: Return to Sender who wrote (11256)	10/13/2004 10:46:23 AM
From: Les H	Read Replies (1) \| Respond to of 29595

Oil Markets: Losing the Saudi Cushion October 11, 2004 Saudi Petroleum and Mineral Resources Minister Ali al-Naimi said Oct. 10 that his country would act to add additional oil to global supplies. In response, oil prices hit a record in excess of $53 a barrel, reflecting the markets' concern that the Saudis have no oil left to give. As the idea takes root, energy markets are in for a series of sharp price spikes -- as much as $10 a barrel in the days ahead. Analysis "My message to the world [is] there's no shortage, there'll be no shortage, and we are willing to meet demand as it rises," Saudi Petroleum and Mineral Resources Minister Ali al-Naimi said Oct. 10 while in Abu Dhabi for talks with his United Arab Emirate and Kuwaiti counterparts. The markets were unimpressed, and crude oil on the New York Mercantile Exchange rose to another record of $53.60 per barrel Oct. 11. Britain's benchmark crude grade, Brent, breached the $50 a barrel barrier for the first time in history the same day. Such price hikes are not likely to settle soon. In fact, repeated price spikes that could add another $10 a barrel within the next few days appear imminent, particularly as energy markets digest the apparent fact that Saudi Arabia's spare capacity does not actually exist. In the modern era, Saudi Arabia is key to international oil markets. As the kingpin for the Organization of Petroleum Exporting Countries (OPEC), Riyadh has used its massive oil reserves -- totaling one-quarter of known oil deposits -- to leverage its political, economic and ideological desires. The center of gravity of the Saudi oil industry, in turn, has always been its spare production capacity. So long as Saudi Arabia has a few million barrels per day of spare capacity, it can threaten to open the taps to drown other producers and protect its market share, or threaten to close the taps to extract political concessions from oil importers. The former was done most famously in the 1980s and contributed to the fall of the Soviet Union, the latter most notably during the 1973 oil embargo, which triggered a global recession. Despite Riyadh's tendency to play the role of Supreme Being with its oil policy, energy markets find themselves comforted by the idea of spare capacity. Because Riyadh rarely is interested in causing worldwide economic damage -- a recessionary world does not purchase much oil -- the Saudis generally leak out or hold back bits of their spare capacity in order to smooth out price spikes and troughs. This helps add a bit of fluidity and stability into the oil markets -- and markets love stability. This is only a feasible scheme if Saudi Arabia does indeed have spare capacity. According to Saudi Arabia's own numbers, it is currently producing 9.5 million barrels per day (bpd) of crude, well in excess of its allowed 8.45 million bpd OPEC quota. What worries the markets is that the Saudis have said on numerous occasions that they are bringing all of their spare capacity -- another 1.5 million bpd -- on line. The markets are jumping not so much because the world's oil supplier of last resort is about to throw the kitchen sink at the problem, but because they are beginning to suspect it already has. Sources that Stratfor has across the energy industry have always taken one fact for granted: Since Saudi Arabia has a little bit more crude to pump, the world is not yet up against the wall. However, al-Naimi first stated that his country would bring all of its spare production on line back in mid-August. In the two months since, not one extra barrel has flowed out of the Saudi deserts. Either the Saudis lied about wanting to tap their spare capacity, or it simply is not there to tap. Considering that every other producer on the planet is pumping full out, the likelihood is that Saudi Arabia's "spare" capacity is nothing of the sort. Meanwhile, with prices at $53 a barrel -- and rising -- this the biggest oil rush since the 1980 hostage crisis when prices topped $70 a barrel in inflation adjusted terms. If the fear that the Saudis are pumping at full capacity takes hold, it will trigger much more than a simple short-term price spike. If the Saudi cushion is indeed gone, then the world is already operating at full production. Any supply disruption would instantly result in a sharp price increase unlikely to fall back in short order. Spare capacity gives the markets confidence that another producer will fill any gaps in the days ahead. No cushion means no replacement supplies. No replacement supplies mean that someone has to go without crude. That means prices may rise another $5-$10 per barrel of crude -- adding even more volatility to an already frazzled market.