Riyadh is losing influence on oil

25 July 2008
The Saudi plan to increase output was shrugged off by market traders. There is an air of resignation in Riyadh over its loss of influence.

Saudi Aramco’s surprise decision last month to plan for a record boost in its long-term crude capacity was just the sort of commitment the kingdom assumed an overheated oil market was looking for.

Yet in the days that followed, oil prices rose. The pledge from the world’s leading oil producer to supply more oil was shrugged off as traders preferred to focus on short-term supply concerns.

It followed a production rise in July when within a day of news emerging that Aramco was to increase output, oil prices hit an all-time record price of almost $140 a barrel.

For Saudi Aramco, the reaction to its latest plan was further evidence that its influence on the market has been sharply reduced in the past few years.

With the movement in crude prices increasingly separated from simple supply and demand issues, even the world’s largest producer has lost much of its sway. This puts the kingdom in a precarious position.

Record oil prices are beginning to reduce demand in the consuming countries on which the kingdom relies.

Aramco now faces a difficult choice over whether to go ahead with the production increases at a time when the fundamentals of the oil market appear more shaky than ever.

The kingdom has some right to be frustrated about its waning influence. Consuming countries continue to demand that the Opec oil cartel, led by Saudi Arabia, should increase production.

Yet when Riyadh reacts with a strong commitment to do this, prices fail to move in the expected way, increasing the level of uncertainty in the market.

While the cause of the escalation in oil prices is widely debated, there is an air of resignation in Riyadh that its ability to dictate prices has been weakened beyond repair.

It remains the integral cog in terms of global production but, at the moment, this counts for little in a market driven far more by speculators than producers.

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