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Saudis seen too late to stem fuel-price rise

Saudi Arabia, the world's largest oil exporter, will be able to do little to stem rising oil and petrol prices this summer because it acted too late and produces the wrong type of oil to make gasoline, analysts said on Monday.
/ Source: Financial Times

Saudi Arabia, the world's largest oil exporter, will be able to do little to stem rising oil and petrol prices this summer because it acted too late and produces the wrong type of oil to make gasoline, analysts said on Monday.

The kingdom will try to persuade other members of the Organization of Petroleum Exporting Countries (OPEC) at a meeting in Amsterdam this week to increase the cartel's output ceiling by 6 percent.

Though Kuwait supports the idea, others including Venezuela are proving reluctant.

Saudi Arabia is one of the countries that has enough spare capacity to make any serious increase and some others, which cannot cash in, do not want to see a significant price drop.

The most striking example of OPEC's lack of spare oil supply is Indonesia, the group's only Asian member, which is on the cusp of becoming a net crude oil importer, raising questions about its membership of the organization.

In spite of concerns about alienating its OPEC brethren, Saudi Arabia has reportedly already told customers in Europe and the U.S. that it would make extra barrels of oil available next month.

But the six-week journey to the U.S. East Coast would not see the first of the extra barrels arrive until late July at the earliest, although many expect that the extra shipments will not reach the U.S. until mid-August, well after the beginning of the summer holiday driving season at the end of this month.

The kingdom said most of these extra barrels were of the heavier oil grades, which analysts expect to be the oil type that is likely to make up the bulk of any extra Saudi output.

Seth Kleinman, energy analyst at PFC Energy, said the majority of the kingdom's spare production was a heavier crude, which is preferred for making heating oil rather than gasoline, which is mostly made from a light crude.

Saudi Arabia is estimated to be able to produce up to 10 millions barrels of oil a day or 2.7 million barrels per day above the amount produced last month.

Mr. Kleinman said three-quarters of Saudi's total output capacity was of the lighter crude variety, and most of this already was being produced to cash in on the higher price for lighter crude. This left spare capacity mainly in the heavier grades.

"It's not ideal," said Mr. Kleinman. "The [U.S.] Gulf refineries are the most sophisticated plants in the world, and they can refine anything, but it will cost more to refine [heavy crude]," he said.

The oil from Saudi Arabia and other Middle Eastern producers is predominately sour crude, which has a higher sulphur content.

He said U.S. refineries were more likely to seek extra volumes of lighter sweet crudes from west Africa, so the higher output of Saudi heavy and medium oils would be destined for east Asia, in particularly China where the country still relied on its oil-fired power generators, which used fuel oil, a product more suited for heavy sour crude.

U.S. refiners' preference for light sweet crudes was underlined by the $8 premium they were prepared to pay for each barrel compared with a barrel of sour crude, Mr. Kleinman said.

U.S. gasoline demand is up about 4 percent above its levels a year ago and is expected to reach a record during this summer of over 9.4 milion barrels per day, or about 12 percent of global crude demand.

This surge has put pressure on the U.S. refinery system and sent gasoline prices to record highs and crude prices to more than $41 a barrel.

U.S. gasoline futures reached $1.4210 a gallon on Monday, another record high, and crude futures touched another peak of $41.85 on news of the fatal attack outside the coalition-backed government headquarters in Baghdad.

Kevin Norrish, energy analyst at Barclays Capital, said the current strong global demand for crude was likely to test Saudi Arabia's ability to sustain higher production levels.

Except for a period early last year when the kingdom increased output to offset supply disruptions from Venezuela and later from Iraq, Saudi Arabia had not produced more than 10 million barrels per day for a sustainable period since the early 1980s, Mr. Norrish said.

However, Ali Naimi, Saudi Arabia's energy minister, said on Monday that his country had 2.5 million barrels per day in spare capacity and could tap into it within less than a week if necessary.