Oil Futures Drop 4.9% in Wake of Saudi Move

Oil futures tumbled Tuesday, offering consumers hope that sustained price relief may be on its way, the day after Saudi Arabia broke ranks with OPEC colleagues and pledged to pump more crude.

Crude oil plunged $1.52, or 4.9%, to settle at $29.58 a barrel in London, as dealers took seriously the Saudi pledge to raise crude output within the next few days despite not having yet secured the support of fellow members of the Organization of Petroleum Exporting Countries.

A surprise statement from Saudi Oil Minister Ali al Naimi late Monday revealed that Riyadh plans to raise daily exports by 500,000 barrels, or about 6%, in an effort to bring prices down to $25 a barrel.

Attention will turn next to U.S. oil markets, which will reopen today after the Fourth of July holiday.

“The Saudis have decided that the period of $30-a-barrel oil is over,” said Jassem al Saddoun, an analyst with the Al Shall economic research institute in Kuwait. “They are very worried about high prices and are under great pressure from the U.S. to get them lower.”

The U.S., which provides military support to most Persian Gulf oil producers, has repeatedly called on OPEC to boost output further, saying $30 a barrel is too high and threatens world economic growth.

The sustained run-up in oil has hit U.S. consumers hard, as gasoline rose to record levels when unadjusted for inflation. Pump prices recently peaked above $2 in some areas of the Midwest and remain above $1.70 in California for a gallon of self-serve regular.

Should the Saudis proceed with their plan, the new oil could be pumped within days. But it would be unlikely to reach U.S. shores in time to relieve lean gasoline inventories during the summer travel season. Tankers take more than a month to complete the passage from the Middle East, meaning additional oil would be available for the fall heating season.

Energy ministers from several OPEC countries reacted Tuesday with statements expressing surprise over the Saudi announcement--as well as assurances to skittish traders of the cartel’s continuing solidarity.

Iranian Oil Minister Bijan Namdar Zanganeh said he had been assured by Saudi Oil Minister Naimi that Riyadh would continue to work within the framework of OPEC.

“Any decision on oil output hikes will be on the basis of OPEC’s decisions and understandings among all OPEC members,” Zanganeh said.

“I have no knowledge about this issue,” said Kuwaiti Oil Minister Sheikh Saud al Sabah. “This requires consultation with other producing countries.”

Ali Rodriguez, the Venezuelan oil minister and current OPEC president, denied that the Saudi move threatened the cartel’s unity.

“I have not yet had any contact with Naimi,” Rodriguez told reporters. “I will be calling him.”

OPEC’s 11 member nations supply about 40% of current global oil consumption of 76 million barrels a day. The cartel and non-OPEC partners including Mexico and Norway have already increased output twice in three months, lifting restrictions on production that had been imposed to boost prices.

Market analysts said there is evidence that Saudi Arabia is prepared to go it alone, if necessary, to boost global production further--an outcome sure to shake up oil markets.

“Judging by the astounded reaction from other OPEC members, it is a unilateral move which stamps Saudi Arabia’s authority on the world oil market,” said Lawrence Eagles of GNI brokers.

Stung by an ill-timed 1997 decision to boost output just as Asian economies were heading toward recession, OPEC has moved slowly to raise production quotas. Many member nations are still recovering from a 1998 glut that sent oil prices below $10 a barrel.

Some cartel members with limited idle capacity are unwilling to stand by and give up oil revenue so consumers can enjoy lower prices. Of the estimated 3 million barrels of idle capacity within OPEC, about 75% is held by Saudi Arabia.

“When an OPEC production increase has been legally determined, there’s no reason to violate an agreement and succumb to lawlessness and act unilaterally,” said an Iranian oil ministry official, the country’s official IRNA news agency reported.