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Saudis Signal They’re Ready to Increase Oil Output After OPEC Disagreement

Saudi Arabia signaled it’s ready to deliver on a pledge to boost the supply of oil after the collapse of OPEC talks two days ago.

The world’s largest oil exporter will increase production, though it’s too early to say by how much, a Saudi industry official with knowledge of the matter who declined to be identified said today. Al-Hayat, citing senior officials, reported earlier that the kingdom will boost output to 10 million barrels a day in July from the current 8.8 million. Oil fell as much as 3.3 percent, the most in three weeks.

Saudi Arabia “wants everyone to understand that they’re serious,” Olivier Jakob, an analyst at Petromatrix GmbH in Zug, Switzerland, said today by phone. “It’s important that the Saudis are signaling that they’re offering additional barrels.”

The June 8 meeting of the Organization of Petroleum Export Countries broke down after six nations led by Iran opposed a Saudi plan to replace lost output from Libya and aid the U.S. economic recovery, Saudi Oil Minister Ali al-Naimi said on the day. The kingdom, along with Kuwait, Qatar and the United Arab Emirates, wanted to increase production by 1.5 million barrels a day. OPEC accounts for 40 percent of global supply.

“This leaves OPEC in a shambles and the Saudis having to do it on their own,” said Leo Drollas, chief economist at the Centre for Global Energy Studies in London. “It shows OPEC is dysfunctional. Saudi Arabia could almost break away with the other Gulf countries and form their own organization.”

‘Worst’ Meeting

Naimi described the Vienna meeting as “the worst” he’s ever attended. It was the first time in more than 20 years that the 12 members adjourned without a consensus on quotas.

Crude fell as much as $3.33 today on the New York Mercantile Exchange and was at $98.82 as 1:57 p.m. Prices are 32 percent higher than a year ago. Brent crude is 57 percent higher than a year ago.

OPEC forecast a “tightening” oil market in its monthly report today as demand for its crude rises. The organization estimated it will need to pump 30.9 million barrels a day in the third quarter, 1.9 million more than it supplied last month. The group described global markets as “well supplied” in April.

“It’s clear we’re going to have more oil,” said Francisco Blanch, head of global commodity research at Bank of America-Merrill Lynch in New York. “The question now is how much production will increase, and how much actually makes it to the market.”

Saudi production in the last two weeks had “a pretty significant uptick, and it’s likely to continue through July,” Blanch said. He reiterated his forecast that oil prices will be slightly lower in the second half of the year.

Well Supplied

The kingdom’s output rose to 8.86 million last month, the most since 2008 and up from 8.8 million in April, according to today’s OPEC report.

Saudi supplies may reach “a little” above 9 million barrels a day this month, according to John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi.

“One million barrels per day is a lot of oil to add in July to a well-supplied market,” he said today from Athens. “All the crude the refiners need for the summer season has already been shipped in April and May. I don’t see a strong reason why the Saudis should hike output by this much in July.”

JPMorgan Chase & Co. (JPM) said it will be a “stretch” for the kingdom to provide all the production needed in the third quarter. The world will require an additional 1.9 million barrels a day of crude from OPEC in the period, analysts led by Lawrence Eagles in New York, wrote in a report today.

Disagreement at this week’s meeting was heightened by the wave of uprisings across the Middle East and North Africa. Saudi Arabia has criticized Iranian support for Shiite Muslim protests in the kingdom’s neighbor, Bahrain. Qatar and the United Arab Emirates are contributing aircraft to NATO’s campaign against Libyan leader Muammar Qaddafi.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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