Beyond Libya, oil market warily eyes Saudi Arabia

NEW YORK — Beyond the crisis in Libya, what's making energy markets nervous — and driving up oil prices — is concern about Saudi Arabia.

The world's largest oil exporter is dealing with protests at home, although smaller in scale than those in nearby countries. Larger demonstrations in neighboring Bahrain have oil traders fearing the unrest could spill across the border.

With the entire region in upheaval, it would be a mistake to think the Saudis have shielded themselves from the anger that ousted leaders in Egypt and Tunisia, Barclays analyst Helima Croft said. The string of rebellions in North Africa and the Middle East took the world by surprise, forcing a fundamental realignment of the region's political power.

"You could say, they're rich, (King) Abdulla's popular, no problem," Croft said. But anything is possible. "If anyone had asked us in January whether (Egypt's) Hosni Mubarak would be gone, most of us would have said 'absolutely not.'"

More than 17,000 Saudis have signed up on a Facebook page calling for a "Day of Rage" on Friday, according to Barclays Capital. That's despite King Abdulla's recent announcement of a $36 billion program for employment, housing and education.

Saudi Arabia has also increased production to make up for a drop in Libyan exports caused by the uprising in the smaller OPEC nation. Doing so, however, will cut into the country's surplus supply for months. Investment banks said Tuesday the move will put enough pressure on world supplies to keep oil prices at elevated levels this spring.

Oil prices have jumped about $20 per barrel since mid-February when the Libyan uprising escalated.

Experts agree that a resolution to that crisis won't necessarily stop oil prices from heading higher.

Analyst and oil trader Stephen Schork said the market is waiting for a sign that the entire region is headed toward a peaceful outcome that will keep crude exports flowing. "That's months away," he said.

That's bad news for drivers in the U.S., where the average price for gasoline has risen about 39 cents per gallon in three weeks, topping $3.50.

Oil futures did decline Tuesday, after OPEC ministers discussed whether to ramp up oil production to make up for Libya's lost exports.

Benchmark West Texas Intermediate crude for April delivery fell 55 cents $1.64 to $104.893.81 per barrel on Tuesday. In London, Brent crude dropped $1.78 to $113.26 per barrel on the ICE Futures exchange.

Libya produced 1.6 million oil barrels per day before fighting forced companies to evacuate workers. Most of that production is been shut down.

Saudi Arabia's oil minister said the kingdom has about 3.5 million barrels per day of spare capacity that could be brought online.

"Saudi Arabia will continue to reliably meet the world's petroleum needs," minister Ali Naimi said.

Boosting production now might cool off overheated energy prices, but experts warn OPEC could weaken its ability to manage global supplies later this year.

Michael Lynch, president of Strategic Energy & Economic Research, said the main concern in the oil market is whether the governments of Saudi Arabia and Iran — OPEC's No. 2 producer — will be dramatically affected by the wave of pro-reform uprisings.

Raising production now "would have a minor calming effect on the market," Lynch said. "Other than that, it's not going to take us back below $100" per barrel.

In the U.S., gasoline pump prices climbed for the 21st straight day, adding nearly a penny on Tuesday to $3.517 per gallon. A gallon of regular is 39.7 cents more expensive than a month ago and 76.4 cents higher than a year ago.

In other Nymex trading for April contracts, heating oil lost 5.66 cents at $3.0091 per gallon and gasoline futures gave up 5.62 cents at $2.9477 per gallon. Natural gas lost less than a penny to $3.915 per 1,000 cubic feet.

The 12-nation Organization of the Petroleum Exporting Countries has so far held its official output quotas unchanged, even as massive protests across the oil-rich Middle East have pushed global oil prices to their highest levels since late 2008. An uprising in OPEC member Libya has stoked supply concerns, increasing pressure on the producer bloc to pump more to ease prices.

The oil minister of OPEC kingpin Saudi Arabia, Ali Naimi, said the oil market remains well-supplied. In an interview with the Saudi state news agency, he reiterated the kingdom's stance that the spike in oil costs stems more from financial speculation and unwarranted investor sentiment than industry fundamentals.

"The Kingdom of Saudi Arabia has long been committed to promoting market stability in the interest of both producers and consumers, and in support of global economic growth and development," Naimi told the Saudi Press Agency.

At the same time, he signaled the kingdom is prepared to act if needed, saying it has 3.5 million barrels a day of spare capacity that could be brought online.

"Time after time we have delivered on that commitment by tapping our additional crude oil production capacity when supply conditions warranted, and Saudi Arabia will continue to reliably meet the world's petroleum needs," he added.

Earlier in the day, Naimi's counterpart in Kuwait told reporters that some OPEC member states, which together produce about 35 percent of the world's oil, had begun informal talks about how to address the price increase.

Kuwaiti oil minister Sheik Ahmed al-Abdullah al-Sabah said OPEC members haven't decided whether the surge warrants an emergency meeting to adjust the group's output quotas.

"We are in consultation, but we have not decided which direction," he said, without providing details of the talks or where they might lead.

Kuwait for now is sticking to its previously agreed quota levels. "We didn't increase," al-Sabah said.

Oil prices hovered near $104 a barrel Tuesday, down from the nearly $107 a barrel struck the previous day, crude's highest level since Sept. 26, 2008. The rapid rise is translating into higher fuel prices.

OPEC is not scheduled to meet again formally until June 8 in Vienna.

Several members of the group routinely produce more than their allotment. The temptation to cheat and pump more rises along with prices.

Iran, OPEC's No. 2 producer, currently holds OPEC's rotating presidency. Its support would likely be crucial in pulling together an emergency meeting but that could be hard to come by, said U.K.-based industry analyst John Hall.

"Iran probably couldn't increase output even if it wanted to," so it is content to let prices remain high, Hall said.

Oil inventories in developed nations remain high. But traders are concerned that the unrest that has ravaged Libya will spread to other major producers, particularly Saudi Arabia, which has witnessed only a handful of small protests so far. Pro-reform protesters are calling for wider demonstrations in Saudi Arabia this week.

Naimi's comments echo those made by smaller producer Qatar on Monday. Its energy minister, Mohammed bin Saleh al-Sada, denied there was a supply shortage and said "stocks are at a healthy level for the consumer." He added that OPEC is closely monitoring the situation and stands ready to act.

"From what we know, a number of countries are happy to check the market if there is any shortage," he said.

Libya sits atop Africa's largest proven reserves of conventional crude, and produces about 1.5 million barrels per day. But the fighting between anti-government rebels and forces loyal to leader Moammar Gadhafi has battered production, lowering output by more than half, according to many estimates.

Saudi Arabia has been increasing its output to offset the Libya export slump.

In oil-rich Nigeria, a spokesman for the state-run Nigerian National Petroleum Corp. said Africa's top crude oil producer would be ready to offer additional barrels if OPEC asks.

"We will do whatever they demand of us to do as a member," Levi Ajuonoma told The Associated Press on Tuesday, cautioning that nobody has contacted them.

It remains unclear what additional production Nigeria can muster at the moment. Royal Dutch Shell PLC recently closed its major Bonga deep-water oil field for maintnenace, which has a capacity to produce more than 200,000 barrels of crude oil a day. But militancy in the country's crude-producing Niger Delta has dropped in recent months, allowing for production to creep back up in the uneasy region where attacks cut into supply.