“We have to look beyond the second quarter, the market will be tight,” Al-Hamli was quoted by Reuters as saying.
His remarks came as a senior Gulf industry official familiar with Saudi oil policy said Saudi Arabia expects to lift production by more than 500,000 barrels a day in June to its highest for three years.
Worried about the impact on economic growth of inflated energy costs, Saudi Arabia is trying to keep a lid on prices now at $114 a barrel for benchmark Brent crude.
The Gulf official said Saudi production was likely to average 9.5-9.7 million bpd in June. A Reuters estimate put output at 8.95 million bpd in May.
Saudi output was last as high in the middle of 2008 after oil prices set a record $147 a barrel, shortly before the recession sent prices crashing.
Commenting on the Kingdom’s production plan, John Sfakianakis, chief economist at Banque Saudi Fransi, said an oil output increase can create macroeconomic benefits as it could lead to higher revenues, as long as prices are not severely depressed, and has an impact on real GDP improvements and as long the added increase is exported and not used for pure domestic consumption.
He said: “In the event of an output increase by Saudi Arabia the extra oil could lead to higher exports but also to higher domestic consumption given seasonal summer demand. It is expected this year’s energy demand will reach new highs as Ramadan will begin in the summer month of August, compelling most Saudis to remain home-bound.”
Sfakianakis said an output increase could lead to extra supply of oil depending on the increase, which could help put some downward pressure on oil prices although there are many determinants impacting oil prices such as the value of the dollar as well as geo-political risk and market speculation.
“For sure, an oil price decline in the $80s range is good for the global economy compared to Brent above $110 per barrel,” he added.
The question, however, will remain if an output increase will lead to a sustained oil price decline or has the global recovery already been impacted that is independent of oil price pressures. Another question is what will happen if the global economy, especially the US and Europe, sees a decline in economic activity and OPEC announces an increase in output? These are questions that will soon be answered.
Jarmo T. Kotilaine, chief economist at the National Commercial Bank (NCB), said: “The oil input increase is generally positive news for the Saudi economy even if in practice it means a continuation of the lop-sided pattern of development seen during the crisis by further consolidating the nexus of oil revenues and government spending.”
Nonetheless, he said, in an increasingly uncertain global economy such reassurance is welcome. The recovery of the private sector is still gathering momentum only fairly gradually.
From the broader perspective of Saudi oil policy in the global context, this is a welcome development.
High oil prices have emerged as a key contributing factor to a potential scenario of stagflation that has triggered policy tightening in emerging markets and further unsustainable stimulus in the West.
It has additionally eroded disposable incomes in economies where fiscal consolidation and poor economic conditions are already undermining living standards.
“By providing this relief, Saudi Arabia is showing global leadership at a difficult time. But this also highlights the reality that, even with the crisis persisting, the oil market conditions are structurally tight,” Kotilaine said.
Gulf Arab producers want, at least, to close the 1.4 million bpd gap between OPEC’s two-and-a-half year old official production limit of 24.8 million bpd and actual output, estimated by OPEC in April at 26.2 million.
However, Reuters reported Kuwaiti Oil Minister Mohammad Al-Busairi as saying: “There is a need for more supply in the market. I expect demand to be strong in the third and fourth quarter, the demand will mainly come from Asia.”
He said: “I expect OPEC to increase output during this meeting but I am still unsure how much.”
