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Oil prices fell nearly $2 a barrel on back of attempts by Saudi Arabia to cool energy markets, amid growing worries about the damage rising costs could have on the global economic recovery.
Brent crude fell as much as $1.79 to $123.92 a barrel on Tuesday morning, before trading at $124.39 later in the day.
Seth Kleinman, head of energy strategy at Citigroup, predicted that Saudi Arabia, at a press conference scheduled for Tuesday afternoon in Doha, would detail its own increased production capacity, and reveal the levels of spare capacity of other Gulf states in an attempt to alleviate concerns over the ability of oil producing nations to increase output.
The moves by Riyadh come as rising energy prices have become a hot political issue in the US presidential race. Republican candidates have accused President Barack Obama of not doing enough to bring prices down.
Mr Obama is giving an address on energy in Cushing, Oklahoma – the strategic delivery point for the West Texas Intermediate benchmark – on Thursday. Some analysts have suggested that a release of strategic petroleum reserves is imminent.
“Despite Opec reassurances, an SPR release may be at hand,” said Hussein Allidina, head of commodity strategy at Morgan Stanley in New York.
Oil prices rallied this month to a post-2008 peak of $128 a barrel on the back of supply disruptions in countries ranging from Colombia to South Sudan and the impact of the forthcoming US and European sanctions on Iranian oil exports. Recent reports that the US and UK may be planning a pre-emptive release of strategic petroleum reserves, has helped cap the recent rise in crude prices.
Saudi Arabia, which holds the world’s largest oil reserves, has not yet publicly disclosed its moves, but Gulf and western officials and traders said the kingdom was boosting its oil exports to the US, after hiring more supertankers last week. They said it was also reviving production at oilfields mothballed decades ago.
The Saudi cabinet on Monday said the kingdom would work “individually” and with others for the “return [of] oil prices to fair levels”.
“High oil prices ... can lead to negative effects on the global economy,” the cabinet said, according to a summary carried by the official Saudi news agency.
However, Saudi Arabia is walking a tight line as it wants to reduce prices while avoiding an open confrontation with Iran. Tehran has warned Saudi Arabia several times over the past two months not to increase production to offset the impact of US and European sanctions on Tehran’s crude exports.
Saudi’s spare capacity has fallen to the lowest level since 2008 after the kingdom boosted its production to 10m barrels a day, a 30-year high.
Saudi Aramco plans to revive the Dammam field, the field that produced the kingdom’s first oil in 1938 until it was mothballed in 1980. The state-owned company has already fast-tracked the development of the giant Manifa oilfield.
The measures by Riyadh come as other countries in Opec, the oil producers’ cartel, also boost their exports. Iraq is bringing about 300,000 b/d of fresh sales on top of current exports of about 2.1m b/d with the opening of a new oil terminal in the Gulf. Saudi Arabia also believes that Kuwait and the United Arab Emirates would be able to boost their exports by several hundred thousand barrels in an emergency.