OPEC Sources: Saudi Arabia, Worried About Strife, Will Let Oil Rise to $120

Saudi Arabia won't take significant steps to bring down the price of crude oil until Brent, the grade traded most on the open market, reaches $120 a barrel, about 8 percent above current levels. That's the conclusion of an internal report prepared by a major investment firm based on information from its extensive and knowledgeable contacts within OPEC.

In the report, which was made available to MoneyWatch on the condition that the firm not be named because briefings with its contacts are off the record, the OPEC sources reiterate their earlier analysis of the oil market, which has proven to be on the nose. They contend that the delicate political situation across the Middle East and North Africa - including the fragile state of affairs within Saudi borders - is preventing the kingdom from doing the sensible economic thing and increasing production to keep prices under control:

"They stressed then, and they continue to stress today, that economics is the wrong way to look at the problem for now. That was 10 days before Egypt's crisis escalated. . . . Saudi Arabia will only add significant extra oil volumes in the event of an actual disruption elsewhere. Iran is publicly stating that $120 per barrel is a fair price and, again, the Saudis do not want to risk being accused of being pro-West. That is regardless of the argument that $120 per barrel may undermine global growth and oil demand. That is not the critical issue today."
Saudi authorities were reported to have raised output late last week to compensate for supply disruptions in Libya, but if the investment firm's sources are right, as they have been since unrest in the region was in its initial phase, the Saudi move may not be as big or as prolonged as many expect. The firm's report indicates that Saudi leaders have other concerns that would persuade them to take less robust steps than usual to stabilize oil prices:

"The main threat is . . . Saudi instability when the current king dies. We know he is very ill but obviously there is no indication of how critical that condition is. But it is acknowledged that the next transition will present a much bigger threat to internal stability. . . . Vested interest groups have been waiting for this transition to push their agenda. Saudi experienced considerable regional instability up to 10 years ago but bought it off with higher oil-based spending. Today the problem is as bad, if not worse. There have been only a few of the promised reforms. . . . Resentment towards the wealth gap with the royals is very high. . . . Even if/when the instability in other countries, such as Libya, settles, the Saudi succession threat is now firmly on the table. What happens in Bahrain could be very key. That alone will keep the oil market nervous for this year."
The investment firm predicts that $120 a barrel will provide greater resistance for buyers to overcome than $100 did. Still, it warns that as the price approaches that level, Saudi Arabia will be inclined to increase production "cautiously rather than aggressively."

The report does not address the impact of $120 oil on stocks and bonds, but it probably would be harmful to both. And what if oil doesn't stop at $120? If Saudi Arabia is beset by a succession struggle and/or something similar to what has happened elsewhere in the region and oil prices shoot past that level, the reaction in financial markets is likely to be severe.