Oil drops as Saudi Arabia offers more crude

LONDON: Crude oil prices dropped on Friday as Saudi Arabia began offering more oil to Asian refiners, easing worries about supply following an inconclusive OPEC meeting.

By 1400 GMT, US crude futures fell by $2.65 to $99.28 a barrel, retreating from early gains and slipping below $100 a barrel.

ICE Brent for July delivery was down $1.18 at $118.39 a barrel, having risen to a high of $120.07 earlier, the highest since May 5.

Top oil exporter Saudi Arabia is offering more crude to Asian refiners in July, industry sources with direct knowledge of negotiations said on Friday, the first evidence the kingdom is taking steps to unilaterally raise supplies.

The country will also boost production in July to 10 million barrels per day, al-Hayat newspaper said on Friday.

The reports eased concerns that supply may dip following a meeting of the Organisation for Petroleum Exporting Countries, which failed to reach agreement on raised production quotas.

"I would expect people to start to digest what happened during the meeting. It means OPEC has no longer a quota, no restraint on production and Saudi Arabia is doing that, offering more to Asian customers. This element today should lead to some pressure on prices," Christophe Barret from Credit Agricole CIB said.

In a meeting on Wednesday, OPEC for the first time in about a decade failed to agree on output policy.

"Today we're seeing a normalisation; it's back to reality," Commerzbank analyst Carsten Fritsch said.

Harry Tchilinguirian from BNP Paribas said OPEC's non-decision leaves countries with spare production capacity free to increase supply on a discretionary basis.

"In this respect, all eyes are on Saudi Arabia as the largest holder of OPEC spare capacity. The Kingdom has demonstrated in the past that it can act unilaterally," Tchilinguirian said in a note.

Merrill Lynch analysts piled into the debate, saying in a note that a breakdown in cohesion in OPEC cannot be a bullish signal for oil prices in the medium term.

"OPEC's position could come back to hurt the cartel as the high cost of energy is a key risk to growth. Our energy as a share of GDP indicator suggests energy prices are reaching maximum affordability for the global economy," they said.

"Our economists believe that the high oil prices washed out the US fiscal stimulus passed in December, hampering the recovery in America. Similar negative effects can be observed in other oil-consuming economies."

The spread between Brent and US light crude, meanwhile, widened to a record $19.09 a barrel.

CHINA DEMAND, POLITICAL TENSION

Prices got support from strong demand by China, which registered a more than 20 percent year-on-year rise in May crude imports. The world's second-largest buyer imported more than 5 million bpd for a fifth consecutive month in May.

"As we go through the second part of the year, there may be a constant upward revision on Chinese oil demand," said Tokyo-based Mitsubishi Corp's risk manager, Tony Nunan.

Political tension in Libya, Syria and Yemen continued to support oil prices. NATO warplanes pummelled a town west of Libya's capital, state media said, soon after Western and Arab powers promised more than $1 billion to help rebels fighting to end Muammar Gaddafi's four-decade rule.

In Syria, thousands fled into Turkey fearing a military assault, officials said, as the country braced for more violent protests against the rule of President Bashar al-Assad.

The latest reports of a government crackdown intensified international concerns over Syria's handling of pro-democracy protests, inspired by uprisings across the Arab world.

Copyright Reuters, 2011