Updated from 1:20 p.m. EDT
Oil prices fell sharply Wednesday after Saudi Arabia, the world's largest exporter of crude oil, moved to increase its production by another 500,000 barrels a day in an effort to bring rising crude prices under control.
The Saudi decision, announced Monday, came less than two weeks after the
Organization of Petroleum Exporting Countries
, of which Saudi Arabia is the de facto leader, decided to increase production by 708,000 barrels a day, in an effort to rein in crude oil prices that exceed $30 a barrel.
The unilateral move by Saudi Arabia, which plans to raise oil output in the next few days if prices do not quickly fall toward $25 a barrel, unnerved the oil markets. On its first trading day since the Saudi announcement, the August oil futures contract settled at $30.67, down $1.83 a barrel, or 6% on the
New York Mercantile Exchange
after trading as low as $30.25. Gasoline and heating oil prices were also down sharply.
Oil stocks were hit as well, with
, the largest integrated oil company in the world finished down 2 19/32, or 3%, at 76 15/16. The second-largest oil company
traded down 2 11/32, or 4%, at 51 7/8, while No. 3
finished down 3 19/32, or 4%, at 82 5/16.
At the same time,
, the largest oil field services company in the world, closed down 2 3/8, or 5%, at 44 9/16, and No. 2
closed down 4 5/16, or 6%, at 70.
Saudi Arabia announced its plan on Monday after the commodities markets in London had closed. The New York Mercantile Exchange was also closed Monday for the long Independence Day holiday weekend. "The timing of the Saudi announcement when the market was closed was calculated to put the market into a bit of disarray," said Tim Evans, senior energy analyst at
Pegasus Econometric Group
"The timing gives the news added emphasis, like an exclamation point," he added. "We walked in today, crude oil was down $2 and we had no opportunity to sell between Friday afternoon and this morning."
Saudi Arabia decided to add more production because OPEC's announcement of a 708,000 barrel-a-day increase failed to lower oil prices and indeed pushed them higher because it was less than market expectations. "The market didn't react the way OPEC anticipated," said John Kilduff, a senior vice president at
. "The market was telling them that more oil needed to be brought on line."
Evans surmised that crude oil would fall into the $25 to $26 range over the next three to four weeks. "That's the roughly stated object of the Saudis," he said. "It doesn't pay to bet against them. They are increasing production by 500,000 barrels a day and could do that roughly another three times in a row without hitting production capacity."
A further impetus for Saudi Arabia was a need to prove that OPEC has the ability to control prices. "They want to control the market and be the dominant supplier," Kilduff added.
OPEC has no interest in encouraging too much oil-drilling investment by non-OPEC producers. Evans pointed out that drilling activity is up significantly from a year ago, with the
survey of oil companies projecting an increase of 18% in exploration and production budgets for this year relative to last year. "That's up from the estimate of three months ago," he said.
"They don't want the high prices to persist, with tertiary sources of oil eating into their market share and creating the oversupplies of two years ago when the markets crashed," Kilduff said. "They want to control the market and be the dominant supplier."
As for other countries that could follow Saudi Arabia's lead, Kuwait and the United Arab Emirates have the capacity to do so. Iran has expressed interest, but it is already operating close to capacity at this point. Countries that have shown an inclination to follow Saudi Arabia's lead and that also have spare capacity include Venezuela and Mexico.
"To the extent that Venezuela and Mexico do follow, that's more relief for the U.S. market," Evans said. "Most Mexican exports come to the U.S. and we are the major trading partner for Venezuela as well. Also shipping time and costs are cheapest to the U.S."