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Crude Prices Drop After OPEC Comments

Posted on: Thursday, 3 June 2004, 06:00 CDT

BEIRUT, Lebanon - Encouraging signals from OPEC that it would raise production had the immediate and desired effect of lowering record-high oil prices. The question now is, how long will it last?

Oil prices plunged 6 percent Wednesday, after the United Arab Emirates and Kuwait pledged during a meeting of the Organization of Petroleum Exporting Countries to join Saudi Arabia in adding fresh barrels to global supplies.

On futures markets, U.S. light crude oil for July delivery tumbled by $2.37 to $39.96 in New York on Wednesday, a day after settling at $42.33 - the highest settlement price in the contract's 21-year history on the New York Mercantile Exchange. In London, July contracts of Brent crude fell by $2.22 to close at $36.86 on the International Petroleum Exchange.

Growing support for higher limits on OPEC production also contributed to the price drop, as did Saudi efforts to ease fears the country's vital oil facilities are threatened by terror attacks.

But oil showed a partial rebound in light after-hours trading early Thursday, suggesting that doubts were creeping in about whether OPEC would follow through with its promises. By afternoon in the Asian trading day, the price on New York's electronic trading system had risen to $40.72.

That was still well short of U.S. crude prices' record finish Tuesday, which followed a suspected al-Qaida assault at the Saudi oil hub of Khobar. The attack - which killed 22 people, mostly foreign oil workers - stunned markets that were already nervous about stretched oil inventories and Middle East tensions.

Saudi Oil Minister Ali Naimi stressed that the kingdom was taking adequate security measures and restated his goal of pushing down prices.

"I assure you that the kingdom and all OPEC members are concerned ... and we don't want high prices," he said in a speech at the Beirut offices of the U.N. Economic and Social Commission for Western Asia.

Representatives from the OPEC arriving in the Lebanese capital expressed a common desire to lift their production ceiling. They gathered for joint talks ahead of a formal meeting Thursday on OPEC's output policy.

Kuwait, Qatar and Nigeria backed the Saudi plan to raise OPEC's production ceiling to 26 million barrels - an increase of 2.5 million barrels.

Under pressure from the United States and other major oil importers, Saudi Arabia has already boosted its actual output by 600,000 barrels a day, independently of OPEC.

The United Arab Emirates' oil minister announced his country would raise production by more than 400,000 barrels per day. As he arrived at Beirut airport, minister Obaid bin Saif al-Nasseri said the hike aimed "to calm the heat of prices."

For the most part, such an increase would represent a return to a normal level of production for the United Arab Emirates after a lull in its output due to maintenance at the country's oil facilities in April.

Kuwaiti Oil Minister Sheik Ahmed Fahd Al Ahmed Al Sabah said Kuwait would increase its output by 100,000 barrels later this month.

Together, the three Gulf states expected to add more than 1 million barrels to global supplies. Analysts said such an increase in actual output would do much more to cool the market than a hike in OPEC's official ceiling.

Although OPEC targets prices within a range of $22 to $28 for its benchmark blend of crudes, prices have exceeded this upper limit since December.

OPEC produces more than a third of the world's crude. It is already pumping 2.3 million barrels above its ceiling, and many of the group's members are producing at close to their capacity.

A radical proposal by Algeria for OPEC to suspend its output ceiling altogether appeared to win no immediate backing.

Algeria's Oil Minister Chakib Khelil suggested that OPEC members temporarily "do away" with their individual production quotas, though he shook his head when asked if such a suspension would cause prices to fall.

"I don't think we will suspend the quotas," responded Kuwait's Sheik Ahmed. "I'm not a supporter of that idea, but we still support the idea of increasing to 26 million barrels."

Saudi Arabia, with the world's largest proven oil reserves, is OPEC's most powerful member. For this reason, a tremor shook the market after gunmen attacked a housing complex for foreign oil workers in Khobar, taking hostages in a standoff that ended Sunday when Saudi forces stormed the facilities. Three of the gunmen escaped.

"They've proven that they can't protect the people at the core of that industry - at least the foreign element," said Jan Stuart, an analyst at the New York brokerage Fimat.

Saudi Arabia employs as many as 30,000 foreigners in its oil industry, and Stuart argued that the Saudi industry's flexibility and efficiency would suffer in coming years if many of these expatriates left the kingdom out of concerns for their safety.

Naimi insisted that his country could continue producing oil without the help of foreigners.

"There are those who believe that if five or 10 foreigners leave, production in the kingdom will stop. And this is all a wrong way of thinking. ... We have refineries that are run by Saudis," he said in his speech.

He said vital Saudi installations were under "intensive protection."

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