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Oil prices rise despite Saudi pledge to raise output

Light, sweet crude for August delivery rose to $136.49 a barrel in Asian electronic trading on the New York Mercantile Exchange by midmorning in Singapore.

business Updated: Jun 23, 2008 11:04 IST

Oil prices rose on Monday as investors shrugged off Saudi Arabia's pledge to increase its oil production if needed, focusing instead on disruptions to Nigerian supply and heightened Middle East tensions.

Saudi Arabia said Sunday it will produce more crude oil this year if the market needs it. The kingdom announced a 300,000 barrel per day production increase in May and said before the start of the Jiddah meeting that it would add another 200,000 barrels per day in July, raising total daily output to 9.7 million barrels. The announcement had already been factored into oil prices, analysts said.

"The meeting was mildly positive but it wouldn't really deliver anything that would give a heavy correction in oil," said Mark Pervan, a senior commodity strategist at the ANZ Bank in Melbourne, Australia. "They pledged production increases that the market thought was base case."

Light, sweet crude for August delivery rose US$1.13 to US$136.49 a barrel in Asian electronic trading on the New York Mercantile Exchange by midmorning in Singapore. The contract rose US$2.76 to settle at US$135.36 a barrel Friday.

Saudi Arabia's pledge fell far short of U.S. hopes for a specific increase. The United States and other nations argue that oil production has not kept up with increasing demand, especially from China, India and the Middle East. But Saudi Arabia and other OPEC countries say there is no shortage of oil and instead blame financial speculation and the falling U.S. dollar. Analysts said the meeting helped provide some clarity as to the size of spare OPEC capacity available. Saudi Arabia said it is willing to invest to boost its spare oil production capacity above the current 12.5 million barrels per day planned for the end of 2009 _ if the market requires it.

"I think where the market may be a little more comforted, which could see prices drift lower in the medium term, is more clarity and scope on OPEC capacity," Pervan said.

Total worldwide crude production is about 85 million barrels per day, but analysts say supplies remain tight amid disruptions to production from Nigeria, Africa's largest producer. "The oil summit really has not done much to temper oil pricing," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "It was a modest output increase and hardly really compensates for the disruption out of Nigeria."

Royal Dutch Shell PLC said Friday that it cannot meet contractual obligations to export oil from a Nigerian oil field following a militant attack Thursday. Nigerian oil workers also reportedly decided to strike at a Chevron Corp. facility beginning Monday. But oil prices might find some relief from Sunday's announcement by Nigeria's main militant group that it would halt attacks starting at midnight Tuesday. The Movement for the Emancipation of the Niger Delta declared a unilateral cease-fire, saying elders in the restive southern region had asked the fighters to allow peace efforts to go ahead.

The group's attacks have sliced about one quarter from Nigeria's normal oil daily oil output, helping buoy crude prices in international markets. "The market will see if indeed that ceasefire holds for a bit of time," Shum said.

Also supporting oil prices were worries about heightened tensions between Israel and Iran, after Pentagon officials said Friday a large-scale Israeli military exercise in the eastern Mediterranean early this month could have been a demonstration of Jerusalem's ability to attack Iranian nuclear facilities.

In other Nymex trading, heating oil futures added 1.46 cents to US$3.7863 a gallon (3.8 liters) while gasoline prices rose 0.93 cent to US$3.4485 a gallon. Natural gas futures rose 19.1 cents to US$13.185 per 1,000 cubic feet.

Brent crude futures rose 69 cents to US$135.55 a barrel on the ICE Futures exchange in London.