Saudis want crude prices to stay above $60

Saudi Arabia wants crude prices to remain above $60 and the oil superpower has based its production policy on that target, according to a Western analyst.

Between April 2006 and April 2007, the kingdom slashed its oil output by more than one million barrels per day to keep prices above the floor, said Leo Drollas, Deputy Director of the London-based Centre for Global Energy Studies (CGES), which is owned by former Saudi oil minister Ahmed Zaki Al Yamani.

When the specter of a US economic recession strengthened early this year, the kingdom tightened its oil taps before it eased them again in March and April following a sharp rise in crude prices.

"Saudi Arabia – the world's marginal supplier of crude – is the dominant player in Opec. Its oil production declined sharply in April 2006, rising in July and August 2006 for seasonal reasons (electricity generation) and then resuming its downward trajectory until April 2007, an overall decline in excess of one million barrels per day," Drollas said in the study this week.

"Saudi output has been rising since then – that is, ever since the Opec basket price went above $60 a barrel...it seems that $60 is the kingdom's floor price, although it would obviously like it to be higher. Since December 2007, Saudis have kept their output more or less constant; in April it fell!"

According to Drollas, a well-known Western energy analyst, Saudi Arabia's marginal crude oil supplies are of the heavy variety, allowing the market to detect policy changes in the kingdom's production by examining variations in the discounts offered on Saudi heavy crude.

"After May 2007, the discounts more than doubled, reaching over $16 a barrel against WTI for oil lifted in December 2007 for the US Gulf Coast," he said.

"However, the discounts were reduced sharply for January 2008 and February 2008 liftings, which suggests that Saudi Arabia did not want to sell more oil, fearing the effect of a possible US recession on oil demand. The discounts have been increased slightly for March and April liftings."

Saudi Arabia is pumping above nine million barrels per day, almost 30 per cent of Opec total crude supplies. The kingdom has pledged to lift output by a further 200,000bpd starting this month in response to repeated calls by Western consumers to push down prices that have rocketed to $145 this week, more than twice their 2007 average and 12 times their level in 1998.

Saudi Arabia, which controls a quarter of the global extractable oil reserves, and other Opec producers have voiced concern about the surge in crude prices but have denied responsibility, blaming speculation and geopolitical factors.

In a separate study last month, CGES said oil prices should average at least $62 to meet an expected increase in Saudi Arabia's expenditure because of higher development needs and payment of part of the public debt.

With Saudi oil production expected at nine million bpd in 2008, the minimum Opec basket price required to cover expected Saudi general expenditure this year, less non-oil income, is $51 a barrel, according to CGES.

"To cover general expenditure plus debt interest (less non-oil income), the price needed is $53. In addition to retire $14 billion of debt as well as allocate $10bn to special government programmes, the kingdom needs $62 a barrel. The CGES expects the Opec basket price to be above $80 a barrel in 2008."

Saudi Arabia has projected a price of $45 for its crude in the 2008 budget, which forecast expenditure at SR450bn (Dh445 bn).

Projecting relatively low oil prices over the past few years has allowed Riyadh to record massive budget surpluses although it has persistently overshot spending targets.

The surpluses have enabled the government to slash the public debt and largely boost its overseas assets, which topped SR1.3 trillion at the end of May, according to the Saudi Arabian Monetary Agency.

After exceeding the GDP in 1999, the public debt was slashed to only 28 per cent of the GDP in 2006 and less than 19 per cent last year, according to the Riyadh-based Jadwa Investment company.

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