Talk is cheap. Especially when you're in the middle of an oil price war.

So Saudi oil minister Ali al-Naimi certainly didn't expect global oil markets to send the price of crude tumbling just because he said "I think high prices are unjustified today" in a March 20 news conference in Qatar.

That's why he paired talk with action -- or at least with talk of the actions that the Saudis had taken or could take. Saudi Arabia had an extra 2.5 million barrels a day of production capacity that it could bring on line, Saudi oil storage reserves around the world were full and a newly hired fleet of super tankers was on en route to the United States.

But al-Naimi must have been disappointed in the market's reaction to this salvo. On that day the price of Brent crude, the European benchmark, fell just $1.59 a barrel, or 1.3%, to close at $124.12. Brent crude is up, as of the close on March 20, by 15% in 2012.

One day's battle doesn't decide a war, certainly, but the Saudis have pulled out their big guns, and they didn't make much of an impression.

Image: Jim Jubak

Jim Jubak

Is there anything Saudi Arabia, or the governments of Europe and the United States, can do to stop oil from moving higher? Or have the speculators won a free hand to drive up oil prices -- and the price of gasoline -- until the day they decide to take their profits?

Let's start by looking at what the Saudis did and why those actions didn't impress the global oil market.

Saudis' big effort draws a 'So what?'

First, al-Naimi talked up Saudi Arabia's ability to raise production. In November, the Saudis increased production to 10.05 million barrels a day. That was the highest level of production in more than 30 years. The country will pump about 9.9 million barrels a day in March and April, and it has the capacity to produce as much as 12.5 million barrels a day, the Saudis say. That would be more than enough to make up for the 1 million barrels a day from Iran that would be lost from global supplies if the United States, Europe, Japan and other countries stop buying Iranian oil as a part of a program of sanctions designed to end that country's efforts to build a nuclear weapon.

Second, al-Naimi ridiculed the idea that the Iranians could cause a global oil crisis by shutting the narrow Strait of Hormuz. "If you believe Hormuz will close, I will sell you the Egyptian pyramids." (Who knew there was a Saudi equivalent of the Brooklyn cry of "Hey, Mister, do you want to buy a bridge?")

Besides scoffing at the Iranian ability to close the waterway, which handles 30% of the world's seaborne trade in oil, al-Naimi pointed out that his country had filled its storage facilities in Rotterdam, Netherlands; Sidi Kerir, Egypt; and Okinawa, Japan. Together, those storage sites hold about 10 million barrels of oil, he noted.

Third, Vela, the shipping arm of government-owned oil producer Saudi Aramco, has an oil express headed for the U.S. In 2011, Vela hired one very large crude oil carrier, a tanker capable of carrying 2 million barrels of oil, every other month, to ship oil to the U.S. Vela has stepped up its hiring rate -- this month -- to 11 very large crude carriers. The message is clear, the Saudis hope: U.S. refineries will have all the oil they need, no matter what happens with Iran, the sanctions and the Strait of Hormuz. (U.S. oil refineries are key to the global prices of refined oil products, because the U.S. is a major exporter of refined petroleum products.)

All in all, that's a pretty impressive lineup of action. So why didn't it knock more off the price of oil than a meager 1.3%?

What the speculators know

A big part of the market's decision to shrug off the Saudi oil minister was a sense that there wasn't anything new in al-Naimi's action plan. Traders who have bid up the price of oil already had these moves figured into their scenario.

So, for example, anyone speculating on the rising price of oil knows the Saudi numbers by heart -- and doubts that the math works out the way al-Naimi says it does. The Saudi oil minister dismissed fears of production shortfalls from the Sudan and Yemen, predicted that Libya's oil production would rapidly recover from the country's civil war, and looked forward to increased production from Iraq. If you're speculating that oil prices will rise, you're operating on a very different assessment of production from these four countries.

And speculators also don't believe the Saudi estimate of how much additional oil the country could pump. In February the International Energy Agency reduced its estimate of the maximum output from Saudi wells to 11.88 million barrels a day, from its previous estimate of 12 million barrels. That puts the agency's estimate more than 600,000 barrels a day below al-Naimi's figures for maximum Saudi production.

There's also the little matter of how much of that "spare" capacity is actually spare. Domestic demand for oil in Saudi Arabia is at a seasonal low. It will rise when summer plunges the country into peak air-conditioning season.

It didn't hurt the speculators' case, either, when on Wednesday the U.S. Energy Information Administration said that U.S. inventories of crude fell by 1.2 million barrels to 346 million barrels in the week ended March 16. Analysts had expected an increase of about 2.2 million barrels. Gasoline inventories dropped as well, by 1.2 million barrels. This is supposed to be the seasonal shoulder period when demand is low and inventories build in advance of the summer driving season.

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What everyone knows of the government budgets in the big oil-producing countries of Saudi Arabia and Russia also makes the speculative trade on higher oil prices more attractive. Russia and Saudi Arabia need $100-a-barrel oil to bring their national budgets into balance. If you're a trader in oil, that serves as a floor to the downside.

When the Saudis and the other members of the Organization of Petroleum Exporting Countries say that $100 a barrel is about right for the global price of oil, they mean it. Even oil producers, such as the Saudis, who want to avoid an oil price shock that would slow the global economy, aren't looking to cut the cash payments and subsidies that they've promised and risk domestic upheaval. For an oil speculator, that limits risk if you're wrong about oil prices going up.

Stocks and fund mentioned in this article: Baker Hughes (BHI, news), Dunkin' Donuts (DNKN, news)and Jubak Global Equity Fund (JUBAX).

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