- The Washington Times - Monday, May 10, 2004

RIYADH, Saudi Arabia (AP) — In a significant shift, Saudi Arabia’s oil minister said yesterday that crude prices have risen far enough, and he will urge OPEC to increase production, reversing an output cut that began just last month.

The change in Saudi oil policy, Oil Minister Ali Naimi said, is because of concern that high prices could hurt the world economy and reduce demand for oil. Oil prices have risen steadily in recent weeks, with U.S. crude oil prices touching $40 a barrel on Friday.

“It is certain that the kingdom believes that increasing the OPEC production ceiling is essential to keep supply and demand balanced,” Mr. Naimi said.

He said the increase, which he planned to propose at a June 3 meeting of the Organization of the Petroleum Exporting Countries, should “not be less than 1.5 million barrels a day.”

That would more than offset the 1 million barrel-a-day cut in OPEC’s production target that went into effect April 1. However, a boost in the production ceiling might have little real effect, analysts said, as most OPEC countries are already producing well over their quotas.

“It’s going to change the quotas more than it’s going to change production,” said analyst Adam Sieminski of Deutsche Bank in London.

OPEC pumps about a third of the world’s oil, and Saudi Arabia is its biggest producer and de facto leader.

Crude oil prices briefly plunged after the announcement. Contracts of U.S. light, sweet crude for June delivery fell by $1.65 a barrel on the New York Mercantile Exchange before recovering to $38.93 a barrel, down $1. June contracts of Brent crude tumbled by $1.67 a barrel on the International Petroleum Exchange in London but rebounded to $36.30.

The change in Saudi oil policy came only weeks after Washington Post journalist Bob Woodward said in a new book that Saudi Arabia had made a deal with the White House to increase oil production to drive down U.S. gasoline prices and help President Bush win re-election. Saudi and U.S. officials denied the report.

Analyst Jan Stuart of FIMAT USA, a New York brokerage, said the Saudi decision was “very curious.”

“It’s diametrically opposite to everything Naimi has been saying” about supplies being adequate to meet demand, he said. OPEC currently has an official ceiling of 23.5 million barrels a day, but analysts and some officials say OPEC countries are producing more than 2 million barrels a day above that. Other than Saudi Arabia, few OPEC countries have the capacity to quickly increase output, so a higher ceiling would effectively legitimize some of the overproduction instead of adding a lot of fresh crude to global supplies.

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