Analysis: Saudi treads carefully as U.S. ties fray

DUBAI (Reuters) - Revolutionary unrest has left Saudi Arabia, the world's oil supplier of last resort, with a more delicate task than usual if it is to satisfy consumer nations, fellow OPEC members and its domestic audience.

Oil prices last week vaulted to a 2-1/2 year high of nearly $120 a barrel, a level potentially damaging to the world's still convalescent economy and far above the range Saudi Arabia has repeatedly said it favors of $70-$80.

The leading exporter has promised it will provide enough oil to make up for any lost to upheaval in OPEC member Libya.

But markets, still around $112 a barrel, have puzzled for days over the extent of its reaction.

"It has been a bit of a weak response. It has been a much less clear response than in previous crises," said Greg Priddy, an energy analyst at Eurasia Group in Washington.

Tension between the United States, the world's biggest oil consumer, and the world's biggest oil exporter was the cause, he said.

Priddy still predicted Saudi Arabia would add any oil needed because it was sufficiently worried about the impact of high prices on the world economy and on fuel demand.

In the latest of a series of clarifications after inconclusive producer-consumer talks in Riyadh last week, a senior Saudi source on Monday confirmed the kingdom was pumping around 9 million barrels per day (bpd), around a million bpd more than its OPEC target.

The source did not say when output had reached that level.

Some questioned how serious Saudi Arabia was about lowering prices and said it could even inadvertently have found common cause with Iran, OPEC's second biggest oil exporter.

"The kingdom finds itself in a quandary," said Theodore Karasik, regional security analyst at the Institute for Near East and Gulf Military Analysis in Dubai. "There have been shifts in the rhetoric."

Iran has favored oil prices of $100 a barrel or higher as it grapples with major spending plans.

Saudi can manage with much less and is mindful of preserving lasting demand for its huge reserves.

But it also has needs of its own as it seeks to ward off the political ferment that has rocked other countries in the region, including neighboring Bahrain. In February, it announced benefits for its people worth some $37 billion.

"The emergence of a new Arab order is having a dramatic impact on regional stability and can ultimately affect the price of oil and what it means for future income," Karasik said.

WEAKENED U.S. TIES

The "new Arab order" has already jolted Saudi Arabia's long-standing oil-for-security bond with the United States.

Analysts say Riyadh takes the view Washington abandoned Hosni Mubarak of Egypt, a key ally in the front against Shi'ite Iran who was toppled by popular unrest earlier this month.

They also say the United States and Saudi Arabia still need each other.

Saudi wants the military backing of the world's remaining super-power. The United States still depends on the almost single-handed ability of Saudi Arabia, keeper of the bulk of the world's readily available spare capacity, to cool overheated markets.

The U.S. deputy energy secretary, attending producer-consumer talks in Riyadh last week, toed the Saudi line, agreeing markets were still well-supplied in spite of the disruption of Libyan production.

That is also the stated view of Iran, holder of OPEC's rotating presidency.

But after Saudi pledged to fill supply gaps, Iran said it would produce according to its OPEC output target rather than above it and that there was not enough clarity on supply disruption to justify meeting to reassess output policy.

Iranian OPEC Governor Mohammad Ali Khatibi implicitly criticized Saudi Arabia for any unilateral changes to supply.

"When we cut, we cut as a group, and when we increase we increase as a group. It's unfair for any member to work on its own," he said.

Saudi Arabia might counter that other OPEC nations have not always joined in with its output cuts to support markets when they nosedive -- and that in its way Iran is also acting alone as it takes advantage of turmoil in Libya to sell crude it had been struggling to offload.

(Additional reporting by Amena Bakr, editing by William Hardy)