Oil prices fall on Saudi plan to increase production
Saudi Arabia is visibly worried following serious reports on US deteriorating economic conditions that may lead to a possible default. If such a scenario took place, the world would witness the worst ever financial crisis. The Saudis , however, can act as a swing producer. It is the only country which has the capacity of increasing oil production by 2-4 million barrel per day. With more oil in the market combined with hot season, oil prices are deemed to fall. Kuwait, UAE and Qatar have also the capacity to increase oil production by about 3 million bpd. Thus, oil consumers should be delighted to see lower oil princes in the coming Good July.
Crude oil prices tumbled when London-based Arabic daily Al-Hayat reported that Saudi Arabia would rise oil production to 10 million barrels per day next month, the highest level in 30 years. This means that Saudi Arabia is increasing its production by 1.2 million barrel per day( currently Saudi Arabia produces 8.8 million bpd). This means that Saudi oil production would increase in July by 13 percent. The decision is viewed as a bold step to assert Saudi influence over OPEC. Al-Hayat , which maintains strong links with Saudi decision makers, said that the Saudi decision was related to extreme concern over very slow global economic recovery and a potential global financial crisis.
The story of Al-Hayat was virtually confirmed when Saudi Arabia offered more crude to Asian refiners in July. This offer is interpreted that Saudi Arabia is taking steps to unilaterally increase oil production after OPEC talks collapsed earlier this week.
The Saudi fear of slower global recovery was derived from negative economic data from China and India the world’s second and fourth biggest oil-consuming countries, responsible for 14 percent of global demand in 2010. In China the export shrank by $ 6 billions. Additionally both stock market and euro are moving lower, which are negative sign for oil.Crude oil for July delivery declined by $2.64 to settle at $99.29 a barrel on the New York Mercantile Exchange. It is the biggest drop since May 11. It is expected that oil prices would further decline in July when the oil productions starts to rise.
The main concern is that the US Republican lawmakers are backing the idea of technical default- essentially delaying interest payments for a few days- as means to force deeper government spending cuts. This could lead to a decline in the dollar’s value with severe reverberation in global markets.
The technical default would slash to junk the ratings on all Treasury securities, seem worldwide as a risk-free investment, if the US government misses debt payment by August 15.