The world's largest oil producer bowed to pressure from its biggest customer, America, and agreed to pump more oil, but the market has taken no solace.
The price of oil for June delivery hovered just below $128 a barrel for much of yesterday, just off the record $127.82 it reached last week, even after Saudi Arabia said it had increased production by 300,000 barrels per day from last month. It closed at $127.05. The announcement, choreographed to coincide with a visit to the kingdom from President George Bush, was not enough to shake worries among the world's biggest oil users about the tightness between growing demand and supply. Next to daily consumption of about 85 million barrels per day, the rise was negligible.
Public comments by other members of Opec, the cartel of oil-producing nations, dismissing the need for further production hikes mean that the price of oil is likely to stay at its current level or continue to hit new record highs, analysts said.
Qatar deputy prime minister, Abdullah bin Hamad al-Attiyah, said that "There is no threat to or crisis in supply", and expressed no appetite to follow the lead of Opec's most influential member. Other Opec nations, including Iran, are resolutely against increasing production. Opec next meets in September.
Saudi Arabia's move "is not enough," said Dr Manouchehr Takin of the Centre for Global Energy Studies. The kingdom is the only member of Opec, the cartel of oil-producing nations, with any real ability to increase production – it has an estimated 2 million extra barrels of production capacity at its disposal.
Opec members, however, are anxious that if they make a clear declaration to hike supply by something in the region of 1 million barrels per day, the price of oil could plummet, depriving them of hundreds of billions of profits. Of the overall oil price, analysts have estimated that as much as $25 is due to financial speculators, investors who if they thought a price fall was coming could rapidly exit their positions, leading to an even more precipitous fall in the oil price.
Opec is not expected to make any significant changes until the health of the global economy is more clear. American consumption has already fallen due to its economic slowdown. The difference has thus far been more than offset by the soaring demand of economies like China and India.
The last time Opec ramped up demand just as recession hit was during the Asian crisis in 1997. The price of oil fell to $10 per barrel.Reuse content