Saudi Arabia Follows Through on Threat to Pump More Oil

   on June 12 2011 12:41 PM

Oil prices fell on Friday as Saudi Arabia reportedly followed through on its threat to defy OPEC and unilaterally increase oil production.

Saudi newspaper al-Hayat said Saudi Arabia will raise oil production to 10 million barrels per day in July. 

Separately, India’s Economic Times reported that India's Mangalore Refinery and Petrochemicals has bought from Saudi Arabia about 600,000 barrels of extra oil for July.  “Two or three Asian buyers are keen on more oil and will finalise any additional volumes in coming days,” another source told ET.

Before the OPEC meeting on June 8, Saudi Arabia lobbied for the organization to increase production quotas.  During the meeting, Saudi Arabia pushed for it. 

However, opposition OPEC members led by Iran opposed an increase in OPEC quotas.  Because of this gridlock, no new OPEC agreement and quotas were established.  Still, Saudi Arabia already threatened during the failed meeting to defy OPEC quotas and boost production unilaterally, sources told Dow Jones. 

The truth is that OPEC is a vulnerable cartel because it has no enforcement mechanisms.  Moreover, none of the members can do anything to Saudi Arabia militarily or economically because of the country’s staunch backing from the US.

There are a number of reasons Saudi Arabia wants to produce more, including making more money, supporting Western economies, and preventing the West from turning to oil alternatives.   

Oil production hawks like Iran, meanwhile, don’t want more production because they’re already producing near capacity.  Therefore, they are incentivized to maximized oil prices at the current global production level.

So where will oil prices go from here?

It’s reasonable to assume it will fall in Saudi Arabia’s preferred range of $75 to $85 per barrel in the short-term.

Most other producers will keep production constant at their maximum capacity, which gives Saudi Arabia control over prices as the incremental and discretionary producer.  It will likely take advantage of this position and adjust their production until prices drift to their desired level.

 

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