June 17, 2008	Tuesday	Jamadi-us-Sani 12, 1429

DUBAI: Saudi Arabia is set to pump at the fastest rate in decades in July as it seeks to rein in a bull market that has ignored its previous two supply increases.

The highest output since 1981 from the world’s biggest oil exporter comes even as Riyadh asserts that global supplies are adequate and other factors have doubled prices in the past year.

But the kingdom will boost supply regardless as it looks to prevent record oil prices from further damaging the global economy and fuel demand. US oil traded near $135 a barrel on Monday after hitting $139 a barrel earlier this month.

Inflated fuel costs have sparked protests worldwide and renewed consumer calls for the Organisation of the Petroleum Exporting Countries, and Saudi in particular, to boost output.

“Saudi Arabia is looking to change sentiment, not to address fundamentals,” said David Kirsch of Washington-based PFC Energy.

“There are strong signs there is plenty of crude out there.”

What is less clear is whether a boost in Saudi supplies will be any more successful than previous hikes in reversing bullish sentiment among the investment funds, banks and oil trading houses that has given momentum to the rally.

“The question is, is it enough?” said one industry insider.

“The concern among speculators is not the short-term, it’s the long term. What do you do for an encore?” The Saudi output plan has emerged a week before it hosts a meeting of oil producers and consumers in Jeddah.

As it boosts supply, Riyadh will also want consuming nations to look harder at the role of investors in the oil markets.

When investment bank Goldman Sachs raised its oil price forecast in May, the market rose to a fresh record and ignored Saudi Arabia’s announcement the same day that it would boost output by 300,000 barrels per day (bpd).

The preceding supply increase from Opec came in September last year. The group said it would raise output by 500,000 bpd and the market hit a record the next day.

LONG-TERM VIEW: Many long-term oil investors are betting supply will struggle to meet demand for years to come.“The Saudi output rise may take some of the heat out of the market,” said Kevin Norrish, oil analyst at Barclays Capital.

“But in the big picture it doesn’t really alter any of the longer-term trends.”

Earlier in oil’s six-year bull run, contracts for delivery years ahead were trading at large discounts to contracts for prompt delivery because investors were expecting high prices would trigger extra supplies.

But on Monday, every monthly US crude contract from July 2008 until Dec 2016 was valued between $134-$137 a barrel.

Investors expect demand from China and other emerging economies to more than outweigh slower consumption from the West while additional supplies from countries outside of Opec has been slow to materialise.

In many mature producers like the UK and Mexico supplies are falling rapidly.

An output boost from Saudi Arabia may allay concerns that it is unable to raise output significantly, Kirsch said. Proponents of the theory that oil supplies are at or near their peak question how much spare capacity the kingdom has.

Riyadh plans to lift output to 9.7 million barrels per day (bpd) in July, United Nations Chief Ban Ki-moon said on Sunday after meeting Saudi Oil Minister Ali al-Naimi.

That would be an increase of 550,000 bpd of over 6 per cent since May and would take Saudi crude output to its highest monthly rate since August 1981, according to US Energy Information Administration data.

“Physically increasing output to that level would not be a problem,” said another industry insider.

Saudi Arabia has a long-held policy of holding spare capacity of 1.5 million to 2 million bpd to cover emergency outages among other producers. Spare capacity stood at the top end of that range earlier this year.

The kingdom is also ready to boost capacity by another 500,000 bpd from the high-quality Khursaniyah oilfield, likely to be in high demand to refine for transport fuels.

Much of Saudi Arabia’s spare oil capacity of around 2 million bpd is of heavy crude that is not suitable for processing into transport fuels.

If crude supplies are already meeting demand on global markets, the kingdom will have to cut prices to encourage refiners to put the oil in storage.

“I heard they are scrambling to find buyers,” said one industry source. “This means severe discounts on heavy crude.”

—Reuters