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Saudis, Soaring Costs May Keep Oil Above $100

Source: Reuters 5/16/2012, Location: Middle East

Oil industry executives and bankers are assuming oil prices will stay above $100 a barrel in the year ahead, despite mounting economic worries, as any fall below that level would trigger a cut in Saudi Arabia's output and force closures at high-cost projects around the world.

A straw poll by Reuters of oil executives, traders, bankers and fund managers showed seven respondents predicting Brent crude trading at $100-$120 a barrel in the next 12 months. Four respondents saw prices at $120-$140 and only four at $80-$100.

At a previous summit last June, most respondents also saw prices above $100.

Then worries centered around supplies following a full outage of Libyan output and OPEC's failure to boost production to compensate for the loss.

By contrast, the current mood is dominated by demand concerns as euro zone collapse worries, poor U.S. economic data and signs of slower demand in China overshadow jitters about a potential loss of Iranian oil supplies.

But although Brent prices are almost $20 down from their 2012 peaks at $110 a barrel, few expect a repeat of the 2008 crash which saw them collapsing to $34 per barrel from an all time high of $147 in a space of six months.

"The marginal cost of production is the ultimate floor in the oil market. In the North Sea it can be $80 to $100 dollars," said Andrew Moorfield from Scotiabank.

"But the real marginal cost of production also includes social costs that some big oil producers need to pay. When you add social costs in Russia and Saudi Arabia, it means that the effective floor on Brent is around $100 a barrel," he said.

Saudi Arabia has ramped up output to 10 million barrels per day - the highest in decades - to calm market fears over a potential outage of Iranian oil flows amid Tehran's stand-off with the West over its nuclear program.

Riyadh has said it wants oil to fall to around $100 a barrel as higher levels damage the global economic recovery.

Saudi's current desired oil price level is only a third higher than $75 per barrel it sought back in 2008. But its oil price budget needs are estimated to have doubled from $50 to $100 as it had to splash money to calm discontent at home and unrest among neighbors.

"I believe there is a floor at $100. Ultimately the Saudis are the ones that have the single biggest positive influence in the oil price, other than anyone starting a war - which would have a negative but upward impression on oil price," said Philip Wolfe, head of energy EMEA for UBS.

"There is no point for the Saudis having production of 10 million barrels per day at $50 or even at $75 per barrel if you can adjust the barrels and keep the oil price up at $100 or more... I think the Saudis can do a lot without having to announce anything," he added.

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