Bloomberg News

Oil Declines; SocGen Sees 65% Chance OPEC to Raise Output Quotas

June 07, 2011

June 7 (Bloomberg) -- Oil dropped for a third day in New York amid speculation OPEC may increase output quotas when it meets in Vienna tomorrow.

Futures slipped as much as 0.7 percent today after falling to the lowest in two weeks yesterday. There is a 65 percent chance the Organization of Petroleum Exporting Countries will raise production limits to lessen the risk high prices will curb demand, Societe Generale SA analysts said in a report today. The global crude market would “welcome” increased oil production from OPEC, Vitol Group Chief Executive Officer Ian Taylor said.

“The outcome of the OPEC meeting will be key,” said Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. in Melbourne, who predicted oil will average $113 a barrel in the third quarter. “The growth outlook from the economic data looks like it’s hit a bit of a softer patch.”

Crude for July delivery slid as much as 68 cents to $98.33 a barrel in electronic trading on the New York Mercantile Exchange and was at $98.71 at 2:42 p.m. Singapore time. The contract yesterday fell $1.21, or 1.2 percent, to $99.01. Prices are up 38 percent the past year.

Brent crude for July delivery was at $114.34 a barrel, down 14 cents, on the London-based ICE Futures Europe exchange. The contract yesterday lost $1.36, or 1.2 percent, to $114.48. Prices are 58 percent higher the past year.

1.5 Million Barrels

OPEC may raise output quotas by 1.5 million barrels a day versus actual production when it meets tomorrow, said SocGen analysts led by Michael Wittner in New York.

“This meeting result is not a slam dunk, though, with a 65 percent probability and a medium level of conviction,” the report said. “We would NOT recommend taking any tactical trading decisions based on the expected outcome of the OPEC meeting.”

The group will have to increase its production target by as much as 2.5 million barrels a day or risk prices rising higher, according to a report from Johannes Benigni, chairman of consultant JBC Energy GmbH in Vienna, received by e-mail yesterday.

“If OPEC doesn’t increase supply sufficiently it would be a tacit communication to the market that $100-plus oil is acceptable,” said Benigni.

OPEC won’t announce a supply increase and will keep its formal production quota unchanged for an eighth consecutive meeting at the June 8 gathering, according to a Bloomberg survey of analysts conducted May 24-31. Venezuelan Oil Minister Rafael Ramirez also said the group is unlikely to raise production.

Libyan Loss

The OPEC members bound by the output quotas, not including Iraq, produced 26.2 million barrels a day in May, or about 1.4 million barrels more than they pledged, according to a Bloomberg News survey of analysts, producers and oil companies. Total supply was 28.9 million barrels a day last month.

Brent has advanced 21 percent this year as unrest in the Middle East and North Africa toppled leaders in Tunisia and Egypt and spread to Libya. The fighting in Libya has removed about 1.5 million barrels a day of output from market.

“We’ve lost Libya, that’s sweet oil that theoretically would be good to replace,” Vitol’s Taylor told reporters at the Asia Oil and Gas Conference in Kuala Lumpur today. “The markets are in small backwardation, which would suggest there’s just about enough oil.”

The European benchmark contract traded at a premium of $15.62 a barrel to U.S. futures today. The difference between front-month contracts in London and New York reached a record $19.54 on Feb. 21. It averaged 76 cents last year.

U.S. Stockpiles

A report from the U.S. Energy Department tomorrow may show U.S. gasoline stockpiles climbed by 1 million barrels last week from 212.3 million, according to a Bloomberg News survey of analysts. Crude inventories probably dropped 1.5 million barrels, the survey shows.

The U.S. unemployment rate unexpectedly climbed to 9.1 percent in May and payrolls grew at the slowest pace in eight months, the Labor Department reported June 3. Employers added 54,000 jobs last month, after a revised 232,000 gain in April that was smaller than initially estimated. The median forecast in a Bloomberg News survey called for payrolls to rise 165,000.

The Energy Department is scheduled to release its Short- term Energy Outlook today. The department last month cut its forecast for global oil consumption for this year to 88.08 million barrels a day from 88.2 million estimated in April.

Options traders increased bets that oil prices will fall further. The most-active option yesterday was the July $95 put, which rose 17 cents to 79 cents. The second-most active contract was the August $90 put, which climbed 13 cents to $1.05.

--With assistance by Christian Schmollinger in Singapore. Editors: Paul Gordon, Jane, Ching Shen Lee

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski in Singapore at akwiatkowsk2@bloomberg.net


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