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Last Updated: Tuesday, 25 May, 2004, 06:53 GMT 07:53 UK
Oil price soars despite Saudi vow
A Saudi oil worker watching a well
The Saudi plan to raise output does not have Opec's full support
Opec ministers have said they will not be pressured into upping production despite Saudi Arabia opting to go it alone and raise its output.

The news came as oil surged more than $1 a barrel to $41.70 in the US on Monday night before easing slightly early on Tuesday.

Earlier, Saudi Arabia promised to boost output to 9.1 million barrels a day in an effort to stem record prices.

But traders fear the Saudi boost cannot make up for soaring demand.

In trade in New York, US light crude soared by $1.77 to close at $41.70 a barrel - just under 21 year highs hit last week.

Meanwhile, in London Brent crude jumped 90 cents to $37.41.

Oil prices fell shortly after the Saudi move to raise output by 800,000 barrels a day, but it was a brief respite as new worries quickly set in.

But Opec stood firm about delaying its decision on production until its June 3 meeting in Beirut.

Iranian oil minister Bijan Zanganeh said: "We have many proposals. We are going to decide which figure and which measure to take in Beirut."

'Too little, too late'

Analysts have voiced fears that Saudi's increase would be unable to meet surging global demand.

Barclays analyst Kevin Norrish said: "The concern is that it is not enough, or that it is too little too late."

Meanwhile, Saudi Arabia's unilateral move to increase production has split the oil cartel Opec.

"There are two worries here - that Saudi doesn't have explicit support for an increase and that spare capacity is so limited," Nauman Barakat, senior vice president at brokers Refco in New York, said.

HIGH OIL PRICES
US oil hit $41.85 a barrel a week ago
That was a 21-year high
Oil consumers are concerned about the threat of inflation

Libya roundly attacked its fellow Opec member for refusing to delay its decision until the next Opec meeting on 3 June.

Following the announcement oil minister Fethi bin Chetwane told reporters: "They can't. It's a mistake. Saudi Arabia alone can't decide to increase production."

Meanwhile, Nigeria has suggested that the cartel may not be able to satisfy surging global demand.

Edmund Daukoru, presidential adviser on oil said: "I believe it is not how much we announce we are going to put on the market, it is how much spare capacity the market believes we have."

Very little spare

Algeria has also warned that a quota rise would legitimise leakage over official curbs, not lower prices.

Energy and mining minister Chakib Khelil said the market had already factored in about three million barrels a day of such leakage.

The cartel - which supplies about a third of the world's oil - targets daily output of 23.5 million barrels per day, but members are already pumping out an extra two million barrels a day - the equivalent of 2.5% of global demand.

As a result, any Opec increase would largely be met by Saudi Arabia as most other members now have very little spare capacity.

Scepticism

Analysts have also begun to fret that any additional oil will not hit the market in time, as the Saudi plans require the introduction of new oilfields.

Marshall Steeves, energy market analyst at Refco, said: "There is scepticism perhaps that the Saudis can increase production as much as they claim.

"It wouldn't take effect until July at the earliest, and any new marginal oil wouldn't get to the United States until some time in August. That wouldn't do much to allay summer concerns with respect to gasoline."

At the end of the day Saudi Arabia is the only country with significant spare capacity and they are not going to be constrained by others with none
Gary Ross, PIRA energy consultancy
Other experts argued that any future increase by Opec would simply be gobbled up by rising global demand - driven by a healthier US economy and rapid growth in China.

At the same time, the US is trying to replenish stockpiles of petrol, and Asian nations are trying to protect themselves from future price shocks by establishing their own strategic reserves.

Ulterior motive

Security concerns have also added to the upward pressure on prices.

Meanwhile, experts also argue that Saudi has an ulterior motive for ramping up production - and calling on Opec to raise supply by 11%, or 2.5 million barrels a day.

With the country controlling 30% of the world's proven reserves, Saudi cannot afford to let runaway oil prices to harm long term fuel demand and give an incentive to invest in alternative energy sources.

Gary Ross, of New York's PIRA energy consultancy added: "At the end of the day Saudi Arabia is the only country with significant spare capacity and they are not going to be constrained by others with none."


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