Did The Crude Oil Summit Just Cause More Problems?

Posted by Bull Bear Trader | 6/23/2008 07:41:00 AM | | 0 comments »

As reported at the WSJ and elsewhere, Saudi Arabia promised at this weekend's oil summit to increase production slightly by 200,000 barrels a day for the rest of the year, if needed. The announcement was expected. On a more long-term basis, Saudi Arabia has also promised to increase its overall output capability to as high as 15 million barrels a day by 2018. The Saudi's currently have an overall capacity 11.4 million barrels a day. This is just a long-term promise, and not a fix for current supply-demand issues, but does indicate that the Saudi's may have spare capacity. Recently, some have worried that the Saudi's were not raising production simply because they could not do so. The recent promises indicates they can, but of course, this extra supply may be difficult to pump and may only be economical at current high prices. The extra oil pumped will no doubt also be made up largely of heavier crude, and not the light sweet crude the world is demanding. Experts also think the 15 million figure is high, and that the Saudi's would be able to reach 12 million barrels a day, at best. Given that crude oil prices were up in Monday morning trading, it is easy to suspect that the markets were also not impressed with news out of Jeddah.

Interestingly, by telling the world what it wanted to hear, the Saudi's may have also put themselves up for more criticism. Indicating that they could increase production sends the signal that they have been holding back, and that supply-demand issues are potentially at the heart of the problem, and not just speculators and the dollar as often stated by OPEC.

As for the near-term impact of the summit, and its associated promises, it looks as though it has not changed the outlook for many analysts. In the Bloomberg clip below, Victor Shum, from Purvin & Gertz, elaborates on supply and demand issues and predicts that demand destruction will increase as we move towards the end of the year. He is also expecting more price spikes in the next few months until falling back to an average value in the $120s as high prices finally cause more extensive reductions in demand.