Bloomberg News

Oil Drops to Two-Week Low; Delegate Says OPEC Will Raise Quotas

June 07, 2011

June 7 (Bloomberg) -- Crude fell to a two-week low in New York, amid speculation that OPEC may increase output quotas when it meets in Vienna tomorrow.

Futures slipped as much as 0.9 percent today after closing at the lowest level in two weeks yesterday. OPEC will raise output targets to help replace missing supplies from Libya and meet demand growth later this year, a Gulf delegate with knowledge of the matter said. There is a 65 percent chance the Organization of Petroleum Exporting Countries will raise production limits to lessen the risk of high prices curbing demand, Societe Generale SA said today in a report.

“OPEC will increase quotas slightly to bring them closer to actual production,” said Axel Herlinghaus, Frankfurt-based senior commodities analyst at DZ Bank AG, which trades crude contracts in New York and London. “The quotas are irrelevant at the moment.”

Crude for July delivery slid as much as 90 cents to $98.11 a barrel in electronic trading on the New York Mercantile Exchange and was at $98.45 at 1:45 p.m. London time. The contract yesterday fell 1.2 percent, to $99.01. Prices are up 38 percent the past year. Brent crude for July delivery was at $114.82 a barrel, up 34 cents, on the London-based ICE Futures Europe exchange.

OPEC may raise output quotas by 1.5 million barrels a day from actual production, said Societe Generale 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.

Supply Cuts

The producer group announced its biggest-ever supply cuts in late 2008 amid a collapse in global demand, capping production at 24.845 million barrels a day for all members except Iraq, which is exempt from the quota system. Its compliance rate with those limits was 69 percent in April, OPEC said in its monthly report on May 12.

“The market has priced in a rise of 1 million barrels a day and if we don’t get that then I’ll expect a rally,” Glen Ward, head of retail derivatives at London Capital Group said, referring to OPEC’s output targets. “I think we’ll only drop further if they raise by more than 1.5 million barrels a day.”

Venezuelan Oil Minister Rafael Ramirez said yesterday the group is unlikely to raise output limits as he arrived in the Austrian capital.

Output Quotas

The 11 OPEC members bound by the output quotas 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 including Iraq 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.

The European benchmark contract traded at a premium of $15.89 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.

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.

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 Lananh Nguyen in London and Christian Schmollinger in Singapore. Editors: Raj Rajendran, Rob Verdonck.

To contact the reporter on this story: Rachel Graham in London rgraham13@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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