National Australia Bank Raises Oil Price Forecasts

National Australia Bank Raises Oil Price Forecasts Through 2008
By Angela Macdonald-Smith
Sept. 28 (Bloomberg

National Australia Bank Ltd., the country's biggest lender, raised its forecasts for crude oil prices through 2008, citing the ``tight'' balance between supply and demand.

West Texas Intermediate, the U.S. benchmark oil variety, may average $66.50 a barrel this year, up from an earlier forecast of $63, while prices may average $65 next year, up from a previous forecast of $60, the Melbourne-based bank said in a quarterly report. Brent crude, a European benchmark, may average $66.90 this year, and $62.78 next year, it said.

``Reflecting the tight market conditions, forecast crude-oil prices have been revised upwards this month,'' National Australia analysts led by Gerard Burg said in the report. ``In 2008, crude markets are expected to remain tight, supported by OPEC production discipline and strong demand from industrializing nations.''

OPEC's influence over the market is set to increase, as Angola's decision to joint the group at the start of 2007 reduced opportunities for production growth outside the cartel, National Australia Bank said.

``Increasing market power for OPEC will be the most significant development in global oil markets in coming years,'' the analysts said.

Saudi Production from IEA

From IEA's September Oil Market Report (OMR), pages 21-22

The supply estimate for Saudi Arabia in July is also revised up by 50 kb/d to 8.67 mb/d and further to 8.7 mb/d for August. Stronger exports account for the July change. This report uses crude supply (comprising exports and domestic refinery throughput) as a proxy for production for Saudi Arabia and some other OPEC producers. Hence data on the JODI system showing 8.9 mb/d output for Saudi Arabia in July include substantial deliveries into storage. This report would normally account for that extra oil in subsequent months when it is exported. Nonetheless, Saudi supply does appear to be edging higher, despite buyers generally suggesting flat-term volumes for the period through October.

New OPEC Quotas

OPEC says Saudis to assume almost two-thirds of output hike
Platts
Sept. 14, 2007

OPEC kingpin Saudi Arabia will boost its production by 327,000 b/d under
the cartel's output increase announced earlier this week, assuming 63% of the
522,000 b/d OPEC plans to put on the market from November 1, according to
figures released by the group Friday.

The Saudis' new production allocation will be 8.943 million b/d. That is
up from August output of 8.616 million b/d, according to figures from
secondary sources used by the cartel.

OPEC, at its meeting Tuesday in Vienna, said it would raise its actual
production by 500,000 b/d from November, while setting a new output target of
27.253 million b/d.

Cartel officials said the new allocation figures would be altered from
August output numbers from secondary sources, which actually results in a
slightly higher planned output increase of 522,000 b/d.

In raising its production target to 27.253 million b/d from 25.8 million
b/d, OPEC essentially formalized 930,000 b/d of overproduction, on top of
adding the 522,000 b/d in new output.

Not all members will see an increase under the new allocations; figures
for Iran and the United Arab Emirates have decreased. Iraq and Angola are not
part of OPEC's output agreements and are not assigned allocations, though
Angola will join the allocation system next year.

Here are the new allocations for OPEC's 10 members bound by output
agreements, from November 1:

              August     New allocation  Change
              output     from Nov 1
Algeria        1,354       1,357           3
Indonesia        839         865          26
Iran           3,869       3,817         -52
Kuwait         2,446       2,531          85
Libya          1,710       1,712           2
Nigeria        2,145       2,163          18
Qatar            821         828           7
Saudi Arabia   8,616       8,943         327
UAE            2,573       2,567          -6
Venezuela      2,358       2,470         112

Total         26,730      27,253         522
(All figures in '000 barrels/day)

Read more about OPEC in Platts OPEC Guide at
http://www.platts.com/Oil/Resources/News%20Features/opec/index.xml

Jim Jubak on OPEC

The oil-producing nations' fast-growing, subsidized economies and soaring consumption of petroleum are big reasons the rest of world is paying more for its crude.

By Jim Jubak
This time, OPEC really is to blame for higher oil prices. [original article]
Jubak's Journal 9/18/2007

In recent days, oil traders and speculators have forced the price of oil above $80 a barrel despite the Organization of Petroleum Exporting Countries' decision to raise production.

I fully expect oil prices to keep rising for the rest of 2007 and into 2008. The only thing likely to stop oil from climbing to $85 a barrel is profit-taking by speculators themselves.

Not every OPEC country is happy about this rise in oil prices. The Saudis, for example, have argued for increased production to hold down prices and keep demand from falling. But oil prices are headed up no matter what OPEC says or does.

And OPEC really doesn't have anyone else to blame for its inability to set prices. Runaway demand in the oil-producing countries themselves is the newest factor pushing up global oil prices.

Why prices are still rising

You can see where oil prices are headed in the reaction Sept. 12 to OPEC's announcement that it would increase production. Despite the news, prices went up that day. The price of a barrel of benchmark West Texas Intermediate crude climbed $1.68 to $79.91.

The next day, crude tacked on an additional 13 cents a barrel to close at $80.04. Speculators were ecstatic: Hedge funds and other traders have staked out big positions in the options market at $80 a barrel that are worth billions as oil climbs above that level.

So why were traders able to move oil prices up in the face of an OPEC production increase?

A 500,000-barrel-a-day increase in production is little more than symbolic. If the Saudis, the driving force behind this increase, were serious about holding prices at this level or driving them down, they would have pushed through an increase of 1 million barrels or more. All an increase of this size does is ratify current levels of production, which are as much as 2 million barrels a day above the official quota.

There's a huge debate inside the oil industry and in the commodity pits about the status of Saudi oil reserves. The Saudis, who produce 9.5 million barrels a day now, have announced they will boost production to 12.5 million barrels, a 32% increase, by the end of this decade and to 15 million barrels by the end of the next decade. However, some oil traders and industry analysts don't think Saudi Arabia can deliver and contend that the Saudis' big oil reserves are in far worse condition than they are letting on. The impact of any shortfall would be huge because the Saudis are the only likely global source of a major increase in oil production in the next five years, according to the International Energy Agency. Without that production increase, the world is headed for a very painful short-term oil squeeze, the agency has concluded. So you can think of energy traders' bets on oil climbing above $80 as a huge vote that the Saudis won't or can't deliver as promised.

Traders and analysts also aren't convinced that OPEC as a whole wants to increase production. The Saudis carry great clout inside that organization, but they have faced fierce opposition this year from an OPEC faction headed by Venezuela and Iran that is adamant about keeping prices as high as possible. Both countries desperately need high oil prices: Oil revenue is the only thing that stands between the regimes that rule in Caracas and Tehran and huge, possibly uncontainable protests. Anything that cuts into revenue, endangering subsidies that keep gasoline prices in Iran near 40 cents a gallon and that fund cheap food and health care in Venezuela, would be a political disaster.

In the past, Venezuela and Iran probably wouldn't have carried the day. OPEC regularly raised production to modulate price spikes, so that peak oil prices wouldn't cut into global economic growth, leading to lower demand for oil and a plunge in oil prices.

In other words, OPEC felt it was in its own interest to avoid pushing the global economy into a slowdown with unsustainably high oil prices. Sometimes OPEC got it wrong and set prices too high or moved too slowly to lower them, but heading off an economic slowdown has been a fundamental part of OPEC policy.

Why higher prices haven't cut demand

But recently, higher global oil prices haven't reduced global demand for oil or pushed economies into recession. In its Sept. 12 projections, the International Energy Agency cut its estimate of global oil demand for the end of 2007 to 85.9 million barrels a day, but that is still 1.7% higher than demand in 2006. For 2008, the agency is projecting a 2.4% increase in demand.

We're less energy intensive

You already know part of the reason for that. The developed economies of the world have become a lot less energy intensive over the past three decades. For example, in the United States, energy use per unit of economic production (gross domestic product) fell by 28% from the OPEC oil embargo of 1973 through 1995.

Higher oil prices were responsible for much of that decrease in energy use. From 1995 through 2004, energy use per unit of the economy fell an additional 26%. This time the decline had less to do with energy prices, which plunged at the beginning of that period, than with the steady shift of the U.S. economy from manufacturing to service industries. The same trend shows up in Europe and Japan.

Because these economies use so much less energy per unit of GDP than they did 30 years ago, they're a lot less sensitive to increases in energy prices. Energy is simply a smaller part of the cost of doing business in these economies for most companies.

Rising economies relatively immune

The other part of the story that you probably know involves the developing economies of China, India and the rest of the rapidly industrializing world. Between 2000 and 2006, when global oil demand grew by 8 million barrels a day, growth from China alone accounted for about 32% of the total increase, according to the International Energy Agency. (The United States accounted for 12.5% of growth.)

Energy use in these developing economies has also been relatively insensitive to rising oil prices. Some developing economies -- China is the most important example -- are mixes of command-style and free-market economies where the government sets prices and determines profit goals.

Also, these economies are showing their own improvements in energy efficiency, and, most important, when an economy is growing at 11% a year, breakneck revenue growth overwhelms concerns that higher energy costs might cut into profit margins. Total profit is growing so fast that nobody worries much if margins are falling.

Subsidies encourage higher consumption

But there's a third part of the global energy demand story that hasn't received much attention until lately -- and it explains why higher oil prices haven't slowed global economic growth more rapidly and why OPEC is getting badly beaten by the energy traders these days.

Remember that I said that China had accounted for 32% of global growth in oil demand from 2000 to 2006 and that the U.S. had accounted for 12.5%? Well, there's another group of countries that, when it comes to global growth in oil demand, has been more important than the U.S. and only slightly less important than China. From 2000 through 2006, OPEC countries themselves accounted for 22% of global growth in oil demand.

In these OPEC countries, because oil consumption is so heavily subsidized, either directly in the consumer market or through government subsidies to energy-intensive industries, the rising market price of oil isn't felt much at all. Though higher market prices for oil are putting pressure on government budgets in these countries -- those subsidies cost money -- they have almost no effect on energy consumption.

From 2000 through 2006, oil consumption by OPEC countries climbed by 1.8 million barrels a day, or 29%. Consumption is projected to climb 400,000 more barrels a day this year. OPEC consumption has been growing at 2.5 times the rate of global consumption.

By the end of this year, consumption growth in OPEC countries will just about wipe out all the 2.2 billion barrels a day in increased production that OPEC has added since 2000.

Little reason for trend to change

Traders are right to assume that this trend isn't about to reverse anytime soon. Saudi Arabia and Iran are determined to use their oil riches to build energy-intensive economies. Venezuela, Mexico and Iran use higher oil revenue to fund their governments and to subsidize prices for everything from gasoline to pharmaceuticals to food. Young and increasingly well-off populations in these countries want the energy-consuming trappings of wealth that are already enjoyed in the developed countries.

And because subsidized domestic market prices for oil and gasoline are so low in OPEC countries, there's little incentive for improving energy efficiency or switching to other fuels.

As oil prices go up, the economies of the OPEC countries boom. That increases consumption in OPEC countries, which drives up oil prices and stretches out the economic boom. Which drives up consumption. Which sends oil prices up again.

I don't know whether you want to call this a vicious or a virtuous cycle, but a cycle it is, and it is clearly pointing to higher oil prices unless the Saudis can pull a couple of million barrels of production a day out of their hats.

The oil speculators have made a pretty good bet.

OPEC's raising output

Myra Saefong's Commodities Corner
OPEC's raising output, but oil prices rally anyway
By Myra P. Saefong, MarketWatch
Sep 11, 2007

It's a bit of a mystery why crude futures closed at a record level Tuesday, even after some of the world's biggest oil producers agreed to a hefty increase in oil output levels.

At a meeting in Vienna on Tuesday, the Organization of the Petroleum Exporting Countries agreed to raise its production level by 500,000 barrels per day, effective Nov. 1.

It wasn't clear, at first, from which production level the increase would be made from.

OPEC's official output quota for 10 of its 12 members was at 25.8 million barrels per day, but the U.S. Energy Department said OPEC's actual output in July, excluding Angola and Iraq, was at 26.7 million barrels per day.

Then news reports emerged with the new official OPEC quota of 27.2 million barrels -- which implies that the cartel is recognizing that it's been producing above its target.

OPEC "'formalized' ... their current overproduction, which was roughly 900,000 barrels per day. Then on top of that, they added 500,000 barrels per day in new production," said Kevin Saville, a managing editor at Platts, who is on site at the meeting in Vienna.

"So, on its face, this wasn't just an empty gesture from OPEC," he said. "It is saying it will add 500,000 barrels per day of new oil on the market from Nov. 1."

But exactly how much of that 500,000 barrels per day will actually hit the market remains to be seen," said Saville.

Carefully worded

Obviously, OPEC raised production because members fear a slowing in the economy and they're trying to keep prices down, said Phil Flynn, a senior analyst at Alaron Trading.

But if the Fed cuts interest rates and the economy isn't slowing as much as people think, then energy demand will remain strong and the market will need more supply, he said.

Given that, the oil market probably rallied because the economy may be stronger than was originally thought, "taking away the thunder from the OPEC increase," he said.

It's all "fuzzy math," on the part of OPEC, he said. It all "comes down to what OPEC thinks their production is, versus what it actually is." And "they're admitting that they're overproducing."

The closing speech Tuesday from Mohamed al-Hamli, president of the OPEC conference and energy minister of the United Arab Emirates, seemed to be carefully worded.

"The conference decided to increase the volume of crude supplied to the market by OPEC member countries, excluding Angola and Iraq, by 500,000 barrels per day," he said.

So traders are realizing that it's not just a "paper increase," said Flynn.

Indeed, based on the news reports, "the move set for Nov. 1 is no longer a symbolic one, but an actual agreement to increase current production figures," said Neal Ryan, a manager and market analyst at Ryan Oil & Gas Partners.

"That being said, it's probably already been priced into the market at this point, as most were hoping to see a number closer to 1 million vs. 500,000," he said in emailed comments.

Difficult decision

Still, it wasn't any easy decision to make in the first place.

"OPEC was between the proverbial rock and a hard place," said James Williams, an economist at WTRG Economics. "U.S. petroleum stocks have been falling. Demand increases in the fourth quarter and without an increase, a shortfall was possible late in the year."

Williams points out that the timing of the increase for November matches the beginning of the peak demand season.

And "by increasing production, OPEC can avoid some of the blame for a recession if it comes," he said.

But at the same time, Williams warned that the market should expect the actual production increase to exceed 500,000 barrels per day.

"While high oil prices are often blamed for causing recessions, recessions usually cause a drop in oil prices and pose the greatest downside risk to price," he said.

Then again, maybe it's all about OPEC "feeling the 'subprime crunch,'" said Anthony Sabino, a professor of law at St. John's University whose legal practice includes oil and gas law.

"Clearly, the oil-exporting nations, who so desperately depend upon 'petro' dollars, euros, and yen, sense that the tightening of credit will cool off the economy and slacken demand," he said in emailed comments.

As such, "the per-barrel price of crude is too high to sustain current sales and inflows of dollars from the oil consuming nations," Sabino said.

By opening the taps wider, OPEC "seeks to drop prices in order to stay marketability in a jittery economic climate," he said.

Meaningless move?

In the end, the decision could just be a meaningless move.

OPEC's quota decision likely means nothing, said Charles Perry, chairman of energy-consulting firm Perry Management.

"Other than the Saudis, the rest of OPEC sort of set their own quotas," he said. "But most are near capacity, so they do not have room to go any higher."

"The real story in all of this is the world is at or near maximum capacity, and will be until a lot of additional production is developed," said Perry.

If OPEC's talking about a target of 27.2 million, then it's already close to its capacity, excluding the Saudis, he said. "Just about everyone is skeptical of OPEC increasing their production very much" with members near their peak production.

OPEC quota level vs. production

OPEC quota level vs. production

The production values for the remainder of 2007 are as follows:
August through October are given the same level as July(26.7 mbpd). November and December are July's level plus 500,000 barrels per day (amount of September 11th effective increase).



Revision: According to the Marketwatch report I have posted above, OPEC has posted an official quota of 27.2 mbpd for November. There might be more revisions coming as the news reports get sorted out.

This article from Rigzone and Platts has a table with August production numbers. It shows total OPEC-10 production as 26.79 mbpd.

Oil Rises to 6-Week High

Oil Rises to 6-Week High on Signs OPEC Will Keep Output Quotas
By Mark Shenk
Sept. 10 (Bloomberg)

Crude oil rose to a six-week high on speculation that OPEC ministers will maintain production targets when they meet tomorrow in Vienna.

Representatives from members including Iran, Kuwait and Qatar said in the past week there's no need to increase quotas that were set last year. Some Persian Gulf producers are discussing an increase, two delegates said today.

``The consensus remains that OPEC will do nothing tomorrow,'' said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut, energy consultant. ``There was fresh discussion about a production increase today, but opposition from Iran and Venezuela is too strong for this to occur.''

Crude oil for October delivery rose 79 cents, or 1 percent, to settle at $77.49 a barrel at 2:49 p.m. on the New York Mercantile Exchange. It was the highest close since July 31. Prices are up 17 percent from a year ago. Futures touched $78.47 at 3:54 p.m. in New York, the highest intraday price since reaching a record $78.77 a barrel on Aug. 1.

`Bullish Mode'

``Technically the market is still in bullish mode,'' said Ric Navy, a broker at BNP Paribas SA in New York. ``We're unable to maintain downward momentum. There were many opportunities for the bears to take prices lower but they failed.''

A 500,000 barrel a day quota increase will be discussed during the meeting and the timing of any increase remains undecided, one of the delegates said. The second delegate said he doubted other OPEC members would agree to such an increase. Both officials declined to be identified before the start of official talks at the group's Vienna headquarters.

``There was speculation that Kuwait, Saudi Arabia and/or the Emirates would ride to the rescue of the Fed and propose that quotas be increased,'' Beutel said. ``If they raise production the Fed can forget about inflation and concentrate on fighting what may turn into a recession.''

Two Federal Reserve bank presidents suggested that the U.S. economy is weakening after the labor market shrank in August, and that the housing market shows no sign of recovery.

`We Can Wait'

``There is no reason to increase output; the market is well supplied,'' Venezuelan Oil Minister Rafael Ramirez said today in an interview. ``We can wait until December.''

Any quota change would be viewed as a surprise. All 23 oil traders and analysts in a Bloomberg survey last week said they expect OPEC to leave its collective target unchanged.

``It's odd that the Saudis are completely silent ahead of this meeting,'' said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. ``I think it is likely they will float a proposal to increase quotas, probably 500,000 to 1 million barrels a day. While I don't think it goes anywhere, it will focus the discussion on the possibility for quota increases later in the year.''

Saudi Arabian Oil Minister Ali al-Naimi declined to comment to reporters in Vienna this morning. Saudi Arabia is the world's biggest oil exporter and the most influential member of OPEC.

OPEC wants respectability

The Energy Report
Phil Flynn
September 10, 2007

OPEC wants respectability. All right Ali, here's your chance. In the past I have compared Ali al-Naimi, the de Facto leader of the OPEC cartel, to Alan Greenspan when he was Federal Reserve Chairman. Let’s face it, Mr. Naimi has relished his role as sort of the central banker of oil. Mr. Naimi is the Saudi Oil Minister and in truth is the most influential man in the OPEC cartel. He has tried to bring a certain degree of respectability to the business of price-fixing and collusion.

Of course if you want to be compared to Alan Greenspan you have to learn to make the tough decisions and inspire others to go along with you. There are reports that Mr. Al-Naimi actually favors an increase in oil production at tomorrow's OPEC meeting but does he have the will and power to make his case to the other members who fear an output increase? There is little doubt that Ali Al-Naimi is an impressive character but does he have what it takes to lead at this important moment in OPEC history?

OPEC members we have heard overnight such as Kuwait, Iran, and Libya oppose an oil output increase. Can he make the tough call and get the rest of the cartel to realize that this might be the most important decision the cartel may make?

If you want to act as a central banker of oil what you should do is add more oil to the market in signs of economic stress. If there is more oil on the market oil prices should go lower and it should make it easier for the economy to avoid a recession. And with the US economy in scary shape after the much worse than expected jobs report last Friday and the chances of a recession rising does Mr. Naimi have the ability to react to an obviously dangerous economic situation?

Yet the cartel has other ideas. OPEC President Mohammad al-Hamli says that despite the tightening of credit in the US the world economy was growing strongly and should continue into next year. But is he as good a judge about the heath of the economy as al-Naimi? Hasn’t much of the growth around the world been fed in part by the US consumer? And wouldn’t the US consumer be better off if the price of oil was trading lower than the $76.00 per barrel area? Why does OPEC not see that a US recession would be a devastating blow to the prospect for oil demand. Is it just greed or is it fear?

Well it’s probably both but the fear was best expressed by Qatari Oil Minister Abdullah bin Hamad al-Attiyah who asked, “What is an increase in oil production, and nobody will buy it?".

In other words, they fear a price collapse if they raise production and demand still falls. They still have nightmares of when they raised production ahead of the Asian financial crisis that nearly bankrupted many in the cartel. In the long run that price drop helped create an environment that lead to one of the largest price run ups in the history of the world oil markets.

Why Saudi Arabia Favors Increasing OPEC's Output

Why Saudi Arabia Favors Increasing OPEC's Output...Officially
September 10, 2007 11:20:AM ET
By Tom Waterman
http://www.oilintel.com/

There's an increasing buzz surrounding the OPEC meeting in Vienna tomorrow that Saudi Arabia -- easily the most influential of cartel members, will make a pitch to increase output in the fourth quarter.

Practically every other cartel member, addicted to the petro-dollars now flowing through its coffers, does not agree. They all point out that crude oil supplies are growing and that any increase in OPEC output would collapse prices.

It's all a mirage anyway as crude supplies are building and OPEC is selling beyond output quotas, by anywhere from 650,000 to 850,000 barrels per day. So what's all the fuss?

We need to go back 10 years or so when OPEC looked at the commodities markets as just another financial instrument that would bow to its will. They never imagined that the price of oil would be set daily in New York or London, instead of Riyadh or Tehran.

Saudi Arabia understands that the explosion in electronic trading, particularly ICE in London, where regulations and oversight are virtually non-existent, speculators can control the price of oil. All it takes is enough money to force a position, and the staying power to see it through, and influence the rest of the speculative community.

There are rumors that some OPEC members, through third party agents, are in fact participating in the London Brent futures market. The suspects are Iran, Venezuela and perhaps Nigeria. What better way to push markets in a favorable direction, using the petro-dollars consumers pay.

It's not clear if Saudi Arabia participates, but it would not be surprising if all OPEC members have a role in conjunction with huge banking firms in manipulating oil prices. The financial ability of OPEC members cannot be underestimated. It would explain how prices can remain artificially high for such an extended period of time.

It also makes sense from the fundamental side. OPEC's power to influence oil prices relies on a joint commitment to restrict supplies in order to prop up prices. The problem with this method is the cartel itself. They simply cannot present a unified front when cutting production. Simply put, they cheat. Some more than others, but every OPEC member will not turn away buyers, especially with prices as high as they have been for the past two years.

There are many reasons the Saudis would favor an increase in output, not the least of which is a means to protect market-share as glut conditions approach. Saudi Arabia is concerned that it is losing ground in some of its Asian markets, and it wants to protect its current U.S. market-share, among other markets.

Through the first six months of 2007, Saudi Arabia supplied 10.7 percent of U.S. imported crude oil. They would prefer to supply about 11.5 percent, a share achieved just once in 2007, in January. In May and June, Saudi Arabia supplied 11.4 percent of U.S. imported oil -- acceptable levels.

However, two countries currently exempt from output restrictions are Iraq and OPEC's newest member -- Angola. Iraq will not have a quota until it can sustain production levels at predictable rates, which might not be for another 5 years. Nevertheless, Iraq is gradually increasing production and its share of the U.S. import market is growing. In May, Iraq supplied the U.S. with 10.6 million barrels of crude oil, or 2.4 percent of total imports. In June, Iraq supplied the U.S. with 17.2 million barrels, or 4.2 percent of total U.S. imports.

Saudi Arabia, while sustaining an 11.4 percent of the U.S. market in May and June, it supplied 4 million less barrels of crude in June than in May.

Angola, the other OPEC member that has no output quota, has been erratic in its supplies to the U.S. The range has been a low of 12.9 million barrels in February (3.8 percent) to a high of 21.4 million barrels in May, or 4.9 percent of the U.S. import market. Angola has also competed successfully for some of Saudi Arabia's Asian customer base.

This is the main reason that Sheik Ahmed Fahd Al Ahmed Al Sabah, who is also Kuwait's oil minister, had talks with Angolan officials about how they will be assigned a quota in the near future. Just as they are ready to bring new production online in early 2008, Angola does not like the timing of being assigned a quota. It seems that the prestige of becoming an OPEC member might not be worth the potential financial sacrifice.

We expect that a quota will be postponed until the second quarter of 2008, after new deepwater production is flowing and its levels have risen.

But there is another reason that Saudi Arabia might favor increasing production in the fourth quarter. Prices are too high. The Saudis always look beyond today and tomorrow. They realize that prices approaching $80 per barrel, while offering tremendous profits, also carry a risk. The risk is a weak U.S. economy that seems to heading toward a possible recession, which will mean a broad worldwide economic slowdown. Perhaps even more important than the Federal Reserve reducing interest rates by a half point would be oil prices that fall to the low $60s.

Saudi Arabia understands that current prices are artificially high, and simply making statements that there is plenty of crude oil available is not enough to overcome the powerful spec money that controls the price of oil. Something else must be done to curb the speculative direction oil is tracking.

There are other reasons to bring prices down. The political battle of wills between Iran and Saudi Arabia as each country tries to influence policies in Iraq should not be underestimated. Iran needs money as it pours support into Shiite dominated Iraq. Saudi Arabia provides cash for the Sunni contingent, trying to carve out its slice of Iraq. The Saudi vault is virtually limitless while Iran works paycheck to paycheck. Every petro-dollar Iran can grab, a certain percentage will work to extend its influence.

As Iran's influence in the region grows, it undermines the Saudi royal family, and beyond all other factors, the royal family wants to remain in power.

This is why I suspect that Saudi Arabia will try to impose its will on the OPEC meeting tomorrow. It's not clear if the Saudis have the will to demand a direction against price hawks like Iran, Venezuela, Libya and Nigeria, but the signals are that the Saudis will either nudge the cartel to announce increases in the fourth quarter. The alternative is that Saudi Arabia could open the spigots and single handedly increase worldwide supplies.

In a dangerous time, Saudi Arabia seeks to limit Iran's influence, and now may be the moment to do so.

Saudi Crude Oil Market Share

Saudi Arabia Crude Oil Market Share Chart 1974 - 2007

data source: EIA Crude including lease condensate monthly numbers

Saudi Aramco Changes Oil Prices

Saudi Aramco Cuts Oil Prices to U.S.; Raises for Asia, Europe
By Nesa Subrahmaniyan
Sept. 5 (Bloomberg)

Saudi Aramco, the world's largest state oil company, cut prices of its crude oil
to be exported to the U.S. in October. It raised prices for Asia and the
Mediterranean, while increasing for two grades to Europe.

Aramco cut
prices of its Arab Light, Arab Medium and Arab Heavy grades it sells to the U.S.
by between 5 cents and 90 cents a barrel, the Dhahran, Saudi Arabia-based
company said in a faxed statement today.

Prices to the U.S. are set
against the West Texas Intermediate benchmark. U.S. refiners would have to pay
minus $5.10 a barrel for Arab Light, minus $7.65 a barrel for Arab Medium and
minus $10 a barrel for Arab Heavy in October. The oil producer kept the discount
of its Extra Light grade unchanged to the U.S. at minus $2.65 a barrel.

For Asian customers, Aramco said it raised the prices of all its grades.
It raised Arab Super Light by 50 cents to a premium of $6.45 a barrel, and the
premium on Extra Light was increased 75 cents to $4.25 a barrel.

Aramco
boosted the premium on Arab Light by 60 cents to $1.35 a barrel, and narrowed
the discounts for Arab Medium by 30 cents to minus $1.05 a barrel and by 25
cents to minus $3.35 a barrel for its Arab Heavy grade. Asian prices are quoted
in relation to the average of Oman and Dubai grades, the two Arabian Gulf
benchmarks used by Asian oil refiners and traders.

Refiners in the
Mediterranean would have to pay more for most Saudi Arabian crude oil shipments
in October. The premium for Arab Extra Light was raised by 40 cents to $1.20 a
barrel, while the discounts for Arab Light and Arab Medium widened by 35 cents
and 5 cents to minus $2.15 a barrel and minus $3.65 a barrel. The discount for
Arab Heavy was cut further by 25 cents to $5.30 a barrel.

European
Prices

For its European customers, Aramco raised prices for shipments of
Arab Extra Light by 20 cents to $1.10 a barrel and narrowed the discount for
Arab Light by 15 cents to minus $2.45 a barrel, the oil producer said. The
discounts for Arab Medium and Arab Heavy grades were widened by 10 cents and 30
cents to minus $4.10 a barrel and minus $5.55 a barrel.

Mediterranean
and European prices are expressed as a differential to Intercontinental
Exchange's weighted average of North Sea Brent crude oil. All prices are
free-on-board, where the buyer has to pay for shipping costs.