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Oil Traders Defy Naimi Pledge, Betting on Higher Prices

Published: April 11, 2012 | 7:39 am
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Oil traders are paying scant attention to assurances from Saudi Arabia that it can raise production enough to cap crude’s advance, after the commodity climbed to the highest level for any quarter since 2008.

Futures have slipped less than 2 percent since March 20, when Oil Minister Ali al-Naimi said Saudi Arabia could boost output by 25 percent immediately if needed. Brent for delivery in July, when the European Union’s ban against Iran comes into force, is at more than $120 a barrel, 20 percent above al- Naimi’s $100 target. The six most widely held options are bets on rising prices, with the most popular being $140 in June, data from London’s ICE Futures Europe exchange show.

The bull market in oil underlines how OPEC output at the highest level in three years and promises of extra production are failing to ease concern that political disputes from Iran to Sudan may disrupt shipments at a time when global economic growth is struggling to gain momentum. Crude plunged 16 percent in late July 2008, from a record $147.50, after Saudi Arabia unilaterally added 500,000 barrels a day to the market and pledged to develop a further 2.5 million barrels a day of capacity from new fields.

“Announcing production capacity and putting oil on the market are not the same thing,” said Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London. “OPEC is pumping well in excess of its oil quota, but you do not yet see the impact through a rise of crude inventories in consuming countries.”

Second-Highest Quarter
Crude averaged $118.45 a barrel last quarter, the most since the three months ending June 2008 when the quarterly average jumped to a record $122.79. Brent, used to price more than half of the world’s oil, gained 13 percent this year through April 9 when it closed at $122.67. Oil plunged more than 2 percent yesterday and was little changed today in anticipation of a U.S. stockpile gain. Al-Naimi told CNN on Jan. 16 that he hoped prices could stabilize near $100.

The six most commonly held Brent options on April 9 were contracts to buy, known as calls. Open interest was highest for calls to buy June Brent futures at $140 a barrel, at 21,025 lots, followed by $150 June calls, ICE data compiled by Bloomberg show.

Fuel inventories in industrialized nations are 69 million barrels less than the five-year average and supplies in emerging nations provide even less of a cushion, the International Energy Agency said in its March 14 monthly report. As many as 1 million barrels a day of exports from Iran, the second-biggest member in the Organization of Petroleum Exporting Countries, may be lost as embargoes enforced by the U.S. and the EU hinder consumers from buying its oil, the IEA said.

OPEC Production
Global inventories are below average even as U.S. stockpiles rose by 10 percent this year. OPEC’s 12 members produced 31.22 million barrels of crude a day last month, the most since October 2008, according to a March 30 Bloomberg survey of oil companies, producers and analysts. Saudi Arabia pumped 9.71 million barrels a day, the survey showed.

South Sudan, which took control of about three-quarters of the former unified country’s output of 490,000 barrels a day when it gained independence in July, halted production in January after the two countries failed to reach an agreement on the transit fees that landlocked South Sudan should pay Sudan, its northern neighbor, to transport oil through a pipeline. Western nations are weighing using strategic reserves as rising prices threaten to crimp the global recovery.

No Shortage
There is no shortage of oil in the market and “the situation is completely different today to 2008,” al-Naimi told reporters at a March 20 briefing in Doha. The world’s biggest crude producer is “willing and ready” to put more oil on the market if there is a buyer, the minister said.

“More oil from the Saudis will make prices come down,” said Leo Drollas, chief economist at the Centre for Global Energy Studies in London. “Worries about what might happen in the Gulf are adding froth to the price, but the fundamental problem is that stocks are low.”

Oil growth will remain “stunted” by the economic slowdown and higher prices, the IEA said. Premier Wen Jiabao cut this year’s growth target for China to 7.5 percent last month from an 8 percent goal in place since 2005, while the European Commission said the 17-nation euro economy will shrink 0.3 percent this year. Only a couple of participants in the U.S. Federal Reserve’s meeting last month called for additional economic stimulus in the world’s biggest oil consumer.

Saudi Oil Production
“If there is no further monetary easing, money for free won’t be there, so that is a big concern for demand,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. “Despite the return of Libyan oil and continuing flows from Iran, Saudi has left production near the highest level. There is no physical shortage, prices will come down if there is less concern about Iran and more liquidity.”

Saudi Arabia may be attempting to bring oil down by pricing its own crude more attractively to entice buyers, JBC Energy GmbH said in an April 5 report. State-run Saudi Arabian Oil Co. cut premiums used in determining its official prices for all grades of crude sold to customers in Asia and Europe for shipment in May, the company said April 4.

The amount of OPEC crude in transit will increase to 506.36 million barrels through to the third week in April, the most since December 2000, as Saudi Arabia boosts exports, Halifax, England-based tanker-tracker Oil Movements said April 5.

Obama’s View
The market is oversupplied by about 2 million barrels a day and more crude is forecast from Libya and Iraq this year, al- Naimi said March 20. Ten days later, following a meeting in Riyadh between U.S. Secretary of State Hillary Clinton and Saudi Arabia’s King Abdullah, U.S. President Barack Obama said that world fuel supplies are sufficient to proceed with sanctions isolating banks that settle oil-related transactions with Iran.

In addition to the embargo that may halve Iranian (OPCRIRAN) exports of more than 2 million barrels a day, non-OPEC nations will sell less oil than originally expected this year because of reduced supply from South Sudan and Syria, the IEA said. That leaves the market more reliant on OPEC’s spare capacity of 2.75 million a day, the agency said in its monthly report. That figure excludes Iraq, Nigeria, Libya and Venezuela.

“The futures market doesn’t believe Naimi or Obama, who say supplies are adequate,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said April 5. “The upside to prices is capped because of talk of the Strategic Petroleum Reserve release and low demand, but no one is selling because they don’t know what will happen with the Iran embargo or whether there will be more supply disruptions.”


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