Dow Jones The hypothetical question posed by the US senator had an easy answer: Top oil executives agreed if Saudi Arabia boosted oil output by one million barrels a day and pledged to keep the taps open for two to three years, oil prices would fall.
In the real world, the question is much more muddled.
Crude oil futures were whipsawed Monday in a cross-current of worries about near-term oil supplies. After signals last Friday of plans for a significant rise in output to nearly 10 million a barrels a day – the highest level in 27 years – promises from the world's largest oil exporter are sounding more subdued.
United Nations Secretary General Ban Ki-moon emerged from talks with Saudi oil minister Ali Naimi in Riyadh Sunday and quoted Naimi as saying the Saudis would be upping output in July by just 200,000 barrels a day, to 9.7 million barrels a day. That's still the most since 1981, but less than expected.
Compounding the market's nervousness over the Saudi moves were reports that Norway's Oseberg oil field suffered a fire, cutting 150,000 barrels a day from supplies, nearly the scope of the truncated Saudi pledge.
Nymex crude oil futures prices surged to a record intraday high, up around $US5 to $139.89 a barrel. But volatile prices posted sharp losses of more than $2 a barrel before settling 27 cents lower at $134.61 a barrel.
Prices are slightly up from May 21, the day of a Senate Judiciary Committee hearing, where Senator Charles Schumer posed the question about the steady one million barrel a day rise, a level which only the senator is proffering.
Stephen Simon, senior vice president of Exxon Mobil, echoed other executives in telling Schumer that the price, in his scenario, would fall because that volume would be "flooding the market with an extra million barrels a day to a well-supplied market."
Price Ignores Fundamentals
In a nutshell, that's the convoluted twist of the current market.
Supplies are ample and stocks are near five-year averages. Oil demand is slumping, but not crashing, in the major industrialised countries, amid record high prices, while demand from China continues to sizzle. And while speculators take the rap for driving up prices, the net long position they hold in Nymex crude oil futures – a bet on higher prices – is the lowest since last August.
Geopolitical concerns, like Iran's nuclear intentions and heightened rhetoric from Israel about the need to attack Iran's nuclear facilities, are stoking the market flames and overriding fundamental forces. The UK on Monday issued a warning of a heightened threat of terrorist attack in the UAE, a key Gulf oil producer.
Some long-time watchers of Saudi oil policy suggested the kingdom may have launched a trial balloon with the UN chief to see how the market would react before a June 22 oil producer-consumer meeting called by Saudi Arabia.
By late Monday, even the White House was echoing UK Prime Minister Gordon Brown's expectations that the meeting wouldn't yield any near-term increases in oil supply. The Saudis have rejected two direct appeals for increased supplies from President George W Bush since January.
The kingdom may be taming bold talk of output rises to avoid stirring up discord within the Organisation of Petroleum Exporting Countries, especially with chief hawks Venezuela and Iran. A Saudi move to boost output to help consumer countries could be seen as a direct hit on lucrative oil revenues for those countries. The Saudis may play it as a necessary move to preserve the long-time position of crude oil in the market where high prices allow alternative energy to chip away at oil's dominance.
In a further example of the disconnect between market fundamentals and soaring prices, Iran has some 20 million barrels of crude oil stored in tankers that it hasn't been able to sell, even as consumer nations yearn for more Saudi oil.
Delicate Saudi Dance
Iranian officials point to heavy spring refinery maintenance, and therefore low demand, as the reason they can't sell the crude. But US sanctions help to limit the available buyers. Iran repeated Monday it intends to clear the overhang by mid-summer, as refiners in Asia and Europe boost operations.
Officials attending the Jeddah talks can count on VIP treatment, maybe including the traditional Saudi sword dance. For the antsy oil market and consumers worldwide, the Saudi policy dance may be trickier than ever before.
A slim rise in output would have little impact on dousing prices and reveal the kingdom no longer has the power to shift the tide of the market.
Worse still, even a big jump in output by the Saudis could backfire, sending prices higher. With just about 1.2 million barrels a day of spare production capacity, at current output of 9.45 million barrels a day, there's a great risk that price would zoom on worries over the razor-thin supply buffer if the Saudis boost production significantly.
In this version of the Saudi sword dance, there's just one chance to make the right move at the right time, to prove wrong forecasters predicting oil prices soon at $150 to $200 a barrel. Judging by the mixed signals from Riyadh, the Saudis are still trying to get a fix on that right move.
David Bird is senior energy correspondent for Dow Jones Newswires
