Saudi-US Friendship Restored; Riyadh Will Speed Up Expansion Of Oil Output Capacity.

*** The Insurgency In Iraq Remains Strong, With The Salafi Suicide Bombers Having Shifted Away From US Troops To Iraqi Targets Including Shiites And Zarqawi's Qaeda Has Warned It Will Kill Sunnis Joining The Govt. Which Dr. Ja'fari Has Formed & Got It Approved By The Nat'l Assembly; Zarqawi's Laptop Has Let To The Arrest Of Several Of His Key Aides

*** Heavily Armoured US Patrols Now Are Regarded As Being Just As Dangerous As The Insurgents, Prone To Open Fire Unpredictably

*** The Baath Regime In Damascus Is Beginning To Face Serious Trouble From Within After Its Precipitated April 25 Pullout From Lebanon - Where It Ruled For 29 Years

NICOSIA - The outcome of recent summit talks between US President George W. Bush and Saudi Crown Prince Abdullah Ibn Abdel Aziz will have positive implications for the world economy and Saudi-American relations. The US will put its weight behind Riyadh's efforts to join the World Trade Organisation (WTO) before end-2005. The friendship between the two allies, strained since 9/11, has been restored.

The talks, held on April 25 at Bush's ranch in Crawford, Texas, were followed by meetings between Prince Abdullah and US business leaders who were assured that Saudi Arabia will speed up expansion of its oil production capacity by doubling its investments in the petroleum sector to more than $50 bn over the next five years. APS learns that Saudi Aramco's programme to boost its oil production capacity to a range of 12.5m-13.3m b/d by 2009 is being revised to a target range of 15m-16m b/d by 2010/11.

Saudi Arabia's oil refining capacity will be increased from 2.1m b/d to over 2.6m b/d, with more than 1.5m b/d of this to be dedicated for export. The latter part of the capacity will consist mainly of heavy conversion, i.e., for Saudi Arabia's heavy/sour crude oils to be turned into clean diesel, almost sulphur-free gasoil and unleaded gasolines. The oil refining sector alone will take up more than 20% of the $50+ bn investment programme, and this excludes new petrochemicals producing plants to be built within refineries that should be on stream by 2010 at Rabigh and Yanbu', on the Red Sea, and at Ras Tanura on the Gulf coast.

The expansion of Saudi Arabia's oil output will help a great deal in easing world crude oil supplies at a time when global demand will have risen considerably. Most of the new Saudi streams will consist of medium to sweet crude oils. The extra refining capacity in Saudi Arabia will help in a big way in view of growing refinery shortages on both sides of Suez, with no new oil refinery having been built in the US since 1976.

Saudi Aramco is to invest in two new major oil refineries in India and a huge refining/petrochemical complex in China. It is still awaiting a green light for two major oil refineries in the US.

The Saudi upstream and downstream investment plans were discussed in detail on April 24 between the kingdom's Petroleum and Mineral Resources Minister, Ali Naimi, and US Vice-president Dick Cheney. Naimi, who was part of Prince Abdullah's delegation at Crawford on April 25, explained to President Bush the real causes of high oil prices - including the role of speculators in futures markets such as NYMEX in New York and the IPE in London (see APS Review's Oil Market Trends of last week in omt17).

In a joint statement at the end of the summit talks in Crawford, the US and Saudi Arabia, the world's largest consumer and exporter of oil respectively, sought to calm markets. The statement said: "Both nations pledge to continue their co-operation so that the oil supply from Saudi Arabia will be available and secure". The statement marked seven decades of relations between the two nations.

Stephen Hadley, the US national security adviser, told reporters at the Texas ranch that the Saudi plans to increase capacity were "good news" for the oil markets. This was followed by a fall in oil prices during the subsequent days. The week on NYMEX closed on April 29 with June WTI settled at $49.72/barrel, $8.56 below its $58.28 peak earlier in the month, while IPE Brent settled at $51.09.

Spot WTI at Cushing settled at $49.72, down $2.05 from the April 28 close. Dated Brent ended at $49.33, with the IPE being in contango. Heating oil on NYMEX ended at $1.4259/gallon, down $6.24 from April 28 and NYMEX gasoline closed at $1.4961/gallon down %5.58 from April 28. NYMEX natural gas closed at $6.58/m BTU, down 16 cents from the April 28 close, and the spot price of gas at Henry Hub closed at $6.64/m BTU, down 22 cents from the April 28 close. The New York City Gas price of gas was $7.08/m BTU, down 2 cents from the April 28 close.

Oil prices began to fall sharply on April 27 as the market reacted to a strong report on US inventories and President promised to reduce US dependence on energy. WTI's June contract on that day closed at $51.61/barrel, down $2.59.

The US Energy Department's EIA and the American Petroleum Institute (API) reported much larger than expected increases in US crude oil supplies. "We now have to look back to May 31, 2002, to find a higher tally and this puts additional pressure on prices", said Tim Evans, senior market analyst at IFR Markets, in a note to clients, adding: "This looks much more like a glut than a shortage". Bush's call for increased independence from foreign oil prompted a move out of the oil futures markets. Fimat analyst Steve Bellino said: "A lot of speculators are liquidating. All are running to the gate at the same time. It's long overdue". IPE Brent for delivery in June shed $1.11 to $53.03/b, after dropping to $52.75 on publication of the US data.

The EIA on April 27 said US crude oil inventories for the week ending on April 22 had risen 5.5m barrels to 324.4m barrels, against Wall Street expectations for a rise of just 650,000. The private-sector API, compiling its own figures supplied by brokers, reported an increase of 4.66m barrels to 324.66m. The EIA reported that gasoline stocks had fallen 300,000 barrels to 211.3m over the week, against a predicted drop of 1.2m barrels, easing supply concerns.