Crude oil prices drop as Saudi Arabia undercuts OPEC

Chicago Tribune

NEW YORK -- The price of crude oil posted its lowest close since February on Tuesday after Saudi Arabia's state oil company told customers in East Asia and Europe to expect the same quantity of oil in November as this month, undercutting OPEC's plans to reduce output.

Crude oil for November delivery slid $1.44, or 2.4 percent, to close at $58.52 a barrel on the New York Mercantile Exchange, the lowest closing price since Feb. 16. Prices are down 25 percent from the record of $78.40 reached July 14.

"This has been a complete disaster" for OPEC, said Michael Guido, director of commodity strategy at Societe Generale in New York.

Saudi Arabia, the world's largest oil exporter, notified refiners in Asia and buyers in Europe that they will get the full volume of oil called for in annual contracts, refinery officials and traders said.

"History shows that OPEC deals only work when the Saudis are on board," said Bill O'Grady, an analyst with A.G. Edwards & Sons in St. Louis. "Allocating the cuts is always the problem. The poor countries want the rich ones to take the hit, and the rich ones will only do that if a cut is in their best interest."

Saudi Aramco sells oil under annual contracts that customers renew each year. Buyers are told each month how much oil they can get the next month so arrangements to ship the cargoes can be made.

Saudi Arabia accounts for almost a third of OPEC's output. The country hasn't officially commented on whether it is taking part in any reduction in OPEC's supplies.

"There are a lot of reasons for the Saudis to keep on pumping at the present rate," O'Grady said. "The Saudis will do what is in their best interest both economically and geopolitically. Lower prices will hurt rivals in OPEC, such as Iran and Venezuela."

OPEC President Edmund Daukoru, Nigeria's oil minister, sent a letter Oct. 8 to members of the Organization of the Petroleum Exporting Countries calling for a reduction of 1 million barrels a day starting Nov. 1.

"The impact of OPEC's recent jawboning has been reduced by the Saudi news," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass. "It is important to not read too much into this."

So far, Nigeria and Venezuela have announced "voluntary" cutbacks totaling a combined 170,000 barrels a day. Several other countries have agreed to informal cutbacks, Daukoru's spokesman said, without giving details.

Some analysts are skeptical that OPEC members will be willing to produce less right now, given that prices remain twice as high as they were three years ago.

"The main thing in watching OPEC is to see what they actually do," said Guy Caruso, head of the statistics arm of the Energy Department. "All other things being equal, there should be enough inventory to deal with uncertain supply."

U.S. supplies in the week ended Sept. 30 were 13 percent above the five-year average for the period. The government is expected to report Wednesday that crude inventories rose by 1.5 million barrels last week.

Meanwhile, heating oil futures fell almost 3 percent, pulled lower by crude oil. Heating oil for November delivery fell 4.88 cents, or 2.8 percent, to $1.6908 a gallon, the biggest decline since Aug. 28. Prices are down 21 percent from their closing high for the year of $2.1435 a gallon on Aug. 7.

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