Saudis may supply more oil on sly

Despite OPEC resisting more production, Saudi Arabia may put more supply on the world market on its own.

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NEW YORK (CNNMoney.com) -- Despite OPEC's rather surprise decision Wednesday to not raise production in the face of $100 oil, experts say one big oil heavyweight will likely slip more crude to an energy-thirsty world.

"The Saudis have made it perfectly clear they are going to seep more oil to the market," said Edward Morse, chief energy economist at Lehman Brothers. "The only question is by how much."

Other analysts agreed with Morse.

"You've got to draw a distinction between what the Saudis do at meetings and what they do behind closed doors," said Leo Drollas, chief economist at the London-based Center for Global Energy Studies.

In fact, the Saudis have already been feeding the market more oil on the sly. After producing 8.6 million barrels a day for most of 2006, the Saudis pumped 8.7 million barrels a day in September and 8.8 million in October, according to the U.S. Energy Information Administration. OPEC's last official production increase wasn't slated to take effect until November.

It's not clear if the Saudis, typically one of only a few OPEC members to strictly adhere to the cartel's quota rules, were actually violating them. One analyst said the production quotas are really more of a target, subject to some degree of interpretation. In October, OPEC supplied 31 million of the 86 million barrels of oil used daily worldwide, according to EIA.

EIA, a U.S. government agency, doesn't issue forward-looking projections for each oil producing country. But it estimates that OPEC will go from pumping 30.7 million barrels a day in November to 31.5 million barrels a day by January.

As Saudi Arabia is the only OPEC country with the ability to produce more oil, there's little doubt where that extra 800,000 barrels of crude will come from.

"Meeting or no meeting, the world needs oil," said one industry analyst. "And the Saudis don't want to see $100 a barrel."

The Saudis fear high oil prices will eventually slow the global economy, and with it demand for crude.

Worries about U.S. growth are growing more acute as the financial sector continues to get battered by losses in the mortgage market. As further testament to the slowing economy, markets are now certain the Federal Reserve will cut interest rates again next week.

"These high prices are not something the Saudis are comfortable with," said Lou Pugliaresi, president of the Energy Policy Research Foundation.

At the same time, the softening economy - and the fact that oil has sold off over $10 in a little under two weeks - is precisely what kept several OPEC nations from supporting a production increase.

Drollas said the so-called "ghost of Jakarta" is still fresh in ministers' minds. In 1997 OPEC increased output just before an Asian economic crisis sapped demand for crude. A year later oil had fallen to $10 a barrel.

Even with a weakening U.S. economy, $3 a gallon gasoline is already keeping a lid on fuel demand, which has been flat for several months. And Drollas said refiners will attempt to draw down stockpiles over the next few weeks to avoid paying taxes on inventories on hand at the end of the year.

Another reason most OPEC nation's don't want a production boost is it will cost them. Aside from Saudi Arabia and a couple of other states with minimal extra production capacity, most OPEC members are already pumping at full capacity.

For them, a boost to output would mean less revenue because they wouldn't be able to offset the falling price of crude with more production.

But quietly slipping more crude onto the market may be in the best interest of the Saudis, who are fearful of $100 oil and staunch allies of the U.S.

"The Saudi government appears to be in a bind," said Morse. "They don't want to create a rift within OPEC, and they don't want to be seen kowtowing to U.S. and European interests."