Analysts Say KSA Unlikely to Lift Oil Output Quickly

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Saudi Arabia is unlikely to boost oil production quickly to ease the rise of crude prices, because it needs high prices for its own increased spending, analysts at an international banking think tank said Tuesday.

After producing 8.6 million barrels a day in 2010, the world's leading oil supplier will only kick up production to about 8.9 million barrels this year, said analysts at the Washington-based Institute of International Finance.

They said Riyadh needs the higher prices to offset its sharp increase in spending, an effort aimed in part at assuaging Saudis amid a surge in public unrest across the Middle East and North Africa.

"So far the production of crude oil in Saudi Arabia for the first quarter was around 8.7, 8.8 (million barrels a day). And recently some unconfirmed reports said that production dropped in March," said Garbis Iradian, the IIF's deputy director for Africa and the Middle East.

"So we don't expect crude oil production in Saudi Arabia will rise over nine million barrels a day," he said.

The Saudi government is overwhelmingly dependent on income from oil exports to fund its budget, and in December economists calculated that expected 2011 spending was based on the country earning $70 to $73 dollars a barrel.

But Iradian said that the figure is much higher after a February spending hike announced by King Abdullah.

"It's in the interest of the Saudi authorities to have now higher oil prices," he said.

"Our calculation shows that the break-even price for this year, given their expenditure profile, is $85 to $86 a barrel... This is the oil price required by the Saudis to balance their budget."

In February Abdullah announced a $36 billion package of social benefits mostly aimed at youth, civil servants and the unemployed, in an effort to stymie potential political disturbances fueled by regional turmoil.

IIF chief economist Philip Suttle linked the higher oil price directly to the Saudi response, which came after uprisings rooted in unhappiness over unemployment and rising prices swept longtime Egyptian and Tunisian leaders from power.

"I think these events... from a fundamental perspective, put a floor on the oil price," Suttle said.

"It helps explain why, instead of the Saudis cracking open the tap, as they should be doing at the moment, they're actually being, if anything, maybe a little bit more restrictive to keep oil prices high, because they need it to meet some financial commitments."

The IIF, an institute supported by banks around the world, predicts the oil price will average around $115 a barrel in 2011.

Prices slid Tuesday in New York and London trade.

Brent North Sea crude for delivery in June dropped $1.29 to $123.83 a barrel, while New York's main futures contract, WTI light sweet crude for June delivery, fell 90 cents to $112.62.