Saudis Reportedly To Raise Oil Output To Lower Prices

Saudi Arabia thinks you are paying too much for gasoline. That's right, a member of OPEC thinks oil prices are too high and reportedly is planning to do something about it.

After failing to persuade other OPEC nations to raise production at last week's meeting, the Saudis have reportedly decided they will, unilaterally, increase the amount of oil they produce, according to an Middle East newspaper. As a result, oil prices dropped sharply in Friday's future's trading.

Crude for July delivery fell to below $100 a barrel on the New York Mercantile Exchange, the biggest one day drop since May 11. That more than offset the big spike in prices that occurred after OPEC ended its meeting with no agreement on production.

Making up for Libya

From the beginning, the Saudis have tried to make up for the loss of oil from Libya, mired in civil unrest since February. Saudi oil officials have repeatedly called for stability in the oil market, to avoid disruption of the global economic recovery.

“An increase in Saudi output has been widely expected, but the size hasn’t been announced,” Hamza Khan, an analyst with the Schork Group Inc., a consulting company in Villanova, Pennsylvania, told Bloomberg News. “The market is interested in any sign of how much they will boost output.”

Two major investment banks, JPMorgan Chase and Goldman Sachs, have forecast sharply higher oil prices in the months ahead. Their energy analysts predict a tightening of supplies later in the year.

An increase in Saudi output might mitigate any supply shortages that might develop in the future. Currently, the U.S. has a significant stockpile of both crude oil and gasoline.

Difference in oil prices

Consumers may be confused about the difference in price of two types of crude oil – West Texas crude, which is traded in New York and Brent, which is traded mostly in Europe. Brent is consistently $15 to $20 a barrel more expensive.

The reason is two-fold. Brent is produced in Libya, and that type of oil is experiencing a short fall because of the fighting there. West Texas is stored at a major terminal in Cushing, Okla., where supplies are overflowing. That ample supply has depressed the price.