May 10, 2004
By Peg Mackey

DUBAI (Reuters) - Leading OPEC producer Saudi Arabia on Monday called on the oil cartel to raise supply limits by at least 1.5 million barrels per day (bpd), just over six percent, to prevent high crude prices derailing global economic growth.

Saudi Oil Minister Ali al-Naimi issued a statement saying that an increase in output by the Organization of the Petroleum Exporting Countries was "essential" to balance global supply and demand after prices spiked to $40 a barrel last week.

"We ... do not want to see prices rise to the level that they negatively affect the growth of the international economy or the demand for oil," said Naimi. "It is apparent that demand, especially that of Asia, has and will continue to increase in the second half of this year."

"We in the kingdom estimate the required increase of the ceiling should not be less than one and half million barrels per day," Naimi's statement said.

Oil prices on Friday hit $40 for the first time in the 13 years since the 1990-1991 Gulf crisis that was sparked by Iraq's invasion of Kuwait. Monday's Saudi statement knocked $1.48 off the price of a barrel of U.S. crude to $38.45 in electronic trade on the New York Mercantile Exchange.

Naimi said the Saudi proposal would be discussed when oil producing countries meet consumer nations at the International Energy Forum in Amsterdam on May 22-24. Policy will be finalized at an OPEC meeting scheduled for June 3 in Beirut.

Riyadh already appears to have backing from its Gulf neighbor the United Arab Emirates. Kuwait, which was against production cuts earlier this year, is also likely to support the plan. And crucially, number two producer Iran said on Saturday that, while it did not want to pander to U.S. demands on OPEC to pump more, it would not oppose an increase should such a move be proposed.


ALARM BELLS

Analysts said extra crude will be needed to prevent oil prices running out of control as world demand rises in the second half of the year, led by China's economic boom and strong U.S. growth.

"Forty dollars a barrel set off alarm bells not only in consuming nations but in the capitals of major oil producers, particularly those with spare capacity and large proven reserves like Saudi Arabia who don't want to damage long-term oil demand," said Gary Ross, chief executive of New York's PIRA Energy consultancy.

"This is a move they have to make. We see demand for OPEC's oil rising by two million barrels a day in the third quarter and by another two million barrels a day in the fourth quarter."

Dealers will be calculating how much actual extra crude OPEC is likely to provide should it raise official quotas by the proposed 1.5 million barrels daily to 25 million bpd.

Latest independent estimates are that 10 cartel members bound by quotas, excluding Iraq, already pumped more than two million bpd in excess of official limits of 23.5 million bpd in April.

Naimi blamed "unwarranted" fears of supply disruptions and heavy speculation on oil by investment funds for high prices.

Traders have been worried about attacks on Middle East oil facilities following killings by Islamic militants at a Saudi petrochemical plant a week ago and a suicide bombing attempt in late April on Iraq's Basra terminal.

The Saudi minister said the concerns had arisen "at a time when only the kingdom and probably two or three other countries have spare production capacity."

But Algerian Oil Minister Chakib Khelil said Middle East tensions would prevent prices falling.

"It doesn't matter whether we increase or not, it's not going to have an impact on prices," Khelil said.

http://www.reuters.com/newsArticle.jhtml?type=businessNews&storyID=5091274