Reports of increased Saudi production weigh on oil prices

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By Chris Kahn, The Associated Press

NEW YORK, N.Y. - Saudi Arabia 's still the boss when it comes to oil.

Prices sank 2.5 per cent Friday on reports that the world's biggest oil exporter will increase production 13 per cent from May levels to 10 million barrels per day. The move, reported by a Saudi Arabian newspaper, comes just days after OPEC snubbed its request to raise production quotas. Analysts see it as a bold step by the Saudis to reassert their dominance over the cartel.

"They're reminding everyone who the sheriff is in town," independent analyst Jim Ritterbusch said.

Benchmark West Texas Intermediate crude for July delivery lost $2.51 at $99.42 per barrel in midday trading on the New York Mercantile Exchange.

If Saudi Arabia makes good on the new production level, it will pump into the market another 1.14 million barrels per day above May levels. That will come close to covering a shortfall in global oil supply expected in the third quarter. OPEC says world demand will exceed supply by 1.45 million barrels per day in the third quarter. The U.S. Energy Information Administration puts the shortfall at 1.81 million barrels per day.

Saudi oil ministers had called for higher production from OPEC members. But its attempt to boost quotas was rejected by Iran and several other countries. Friday's report in al-Hayat newspaper gave investors a glimpse at how the Saudis will respond.

"They're going to unilaterally decide for themselves when to supply the market," analyst Andrew Lipow said.

Saudi Arabia , the only country in the world that can significantly increase oil production quickly, already exceeds its OPEC quota, analysts said. The Saudis previously said they were ready to supply even more oil if the world needed it, but analysts wondered if they would do that, given recent increases to Saudi domestic spending.

J.P. Morgan analyst Lawrence Eagles noted the 10-million barrel increase would raise production by 500,000 barrels per day from current levels. The increased production is expected to cool off a 26 per cent price rise in oil and a 27 per cent increase in gasoline this year. Average gasoline pump prices have been sliding since May and are expected to drop as low as $3.50 per gallon this month. On Friday the national average fell 1.1 cents to $3.723 per gallon, according to AAA, Wright Express and Oil Price Information Service. A gallon of regular is about 24 cents cheaper than a month ago, but it's still $1.017 per gallon higher than a year ago.

In other Nymex trading for July contracts, heating oil gave up 4.3 cents to $3.0948 per gallon and gasoline futures lost 3.42 cents to $3.0056 per gallon. Natural gas added 6 cents to $4.734 per 1,000 cubic feet.

In London, Brent crude fell $1.51 to $118.06 per barrel on the ICE Futures exchange.