Jeddah: output decision?

Saudi Arabia hosts a meeting in Jeddah on Sunday with oil producers and consumers to discuss record high oil prices. It is unlikely any meaningful promises to increase output will emerge.

Saudi Arabia indicated to UN Secretary General Ban Ki-Moon last weekend that it was prepared to raise oil production by 200,000 barrels a day in July. However, the market reaction to the statement failed to bring down prices. Prices instead shot up, to roughly $140 per barrel. This gives credence to the Saudis' theory that the significant rise in oil prices has been due to speculative financial markets rather than actual supply and demand conditions. Increased production may not dampen prices, giving oil producers less reason to commit to major increases.

On the other hand, oil-consuming countries take the opposite view and continue to pressure OPEC to increase production levels. Global demand remains high, driven by continuing growth in developing countries like China and India. Supply remains uncertain as mature fields reach capacity and introduction of new fields remains tenuous.

The continued weakness of the US dollar is not helping to reduce prices. Since oil is denominated in greenbacks, any decrease in the dollar places upward pressure on prices. With an expected interest rate increase expected in Europe in July, any chance of the dollar gaining enough ground to ease the upward pressure on oil is slim.