Monday 18 April 2011

Is the oil market really oversupplied? | Energy Source – FT.com

Brent priceThe only thing more surprising than the comment from Ali Naimi, the Saudi oil minister, that the oil market is oversupplied, is how seriously the market appears to have taken it. The oil price has dipped sharply today, according to some at least, because of Naimi’s comments.

The evidence Naimi cites is that the Saudis cut output last month by some 800,000 barrels per day. Some of this may have come from reduced Japanese output, afterthe earthquake put many of its refineries out of action. But this demand is likely to return relatively soon – it certainly shouldn’t be viewed as gone from the market in the long term.

Another, possibly more important reason for the Saudis to cut output is to manage their medium-term spare capacity. Although the market is comfortable with the 3.5m barrels the Saudis say they have, traders are particularly concerned about whether that number is rising or falling. To support prices, the Saudis have to show that capacity is not being eroded.


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