Bloomberg News

Oil Rises Amid Concern That OPEC Spare Capacity Will Tighten

June 07, 2011

June 7 (Bloomberg) -- Oil edged higher in New York and surged the most in almost two weeks in London amid speculation that an increase in OPEC production quotas will reduce spare capacity and cause tight supplies when demand rebounds.

New York futures climbed 8 cents, erasing declines in the last 90 seconds of trading. Brent gained more than $2 a barrel after a Gulf delegate with knowledge of the matter said OPEC members agree on the need to raise output. The U.S. raised its forecast for global oil consumption for this year.

“Adding more crude to the system isn’t making a difference because it’s not crude we need or are going to use,” said Carl Larry, director of energy derivatives and research with Blue Ocean Brokerage LLC in New York. “They’re taking away barrels from the spare capacity from the back end and that’s making it bullish rather than bearish.”

Crude for July delivery settled at $99.09 a barrel on the New York Mercantile Exchange, the first gain in three days. Earlier, the contract touched $97.74, the lowest intraday price since May 24. Oil is up 39 percent in the past year.

Prices advanced from the settlement after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles decreased 5.51 million barrels to 366.1 million. July oil rose 57 cents, or 0.6 percent, to $99.58 a barrel in electronic trading at 4:31 p.m.

Brent crude for July delivery gained $2.30, or 2 percent, to $116.78 a barrel on the London-based ICE Futures Europe exchange. It was the biggest increase since May 25.

Brent’s premium to New York futures was $17.69 a barrel. Earlier today, it widened to a record $17.91. The difference between the front-month contracts in London and New York averaged 63 cents last year.

Brent Rises

Brent has advanced 23 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 oil output from the market.

West Texas Intermediate crude, the U.S. benchmark, has gained 8.4 percent during the same period amid a glut of supply at Cushing, Oklahoma, the delivery point for the New York contract. Cushing supplies reached a record 41.9 million barrels in the week ended April 8, according to the Energy Department.

The Organization of Petroleum Exporting Countries is producing 2 million barrels a day above its official ceiling, the delegate said, declining to be named because he isn’t authorized to speak publicly. An increase in the output targets would help replace missing supplies from Libya and meet demand- growth projections for later this year.

OPEC ministers are scheduled to meet tomorrow in Vienna.

Spare Capacity

OPEC had 5.94 million barrels a day in spare capacity in May, down 2.7 percent from April, based on Bloomberg estimates. Spare capacity was 6.31 million barrels a day in March, the highest level since May 2009.

The U.S. Energy Department raised its forecast for global oil consumption for this year to 88.43 million barrels a day from 88.08 million in May, according to its monthly Short-Term Energy Outlook, released today. It cut its oil-price forecast to an average $101.91 for 2011 from $102.67 last month.

OPEC will likely increase production quotas by 1.5 million barrels a day, analysts from Societe Generale SA and Morgan Stanley said in reports today. That would be about a quarter of the group’s spare capacity, based on Bloomberg estimates.

The forecast OPEC increase is likely to come from actual production, according to the note by Societe Generale analysts led by Michael Wittner in New York.

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.

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

OPEC’s decision tomorrow could be the “catalyst” that causes New York futures to break out of their four-week range of $95 to $105 a barrel, Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, said on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene.

If oil rises after the meeting, it’s likely to rebound to above $106 a barrel and then target highs from early May of almost $115 a barrel, he said. If OPEC’s decision is a “surprise” that causes prices to drop below $95, it’s likely to plummet through $90 and test $88.87 a barrel, Schork said. Oil last traded that low in February.

Oil volume in electronic trading on the Nymex was 724,956 contracts as of 3:31 p.m. in New York. Volume totaled 509,468 contracts yesterday, 23 percent below the average of the past three months. Open interest was 1.51 million contracts, the lowest level since March 22.

--With assistance by Ayesha Daya and Fred Pals in Vienna, Rachel Graham in London and Mark Shenk in New York. Editors: Joe Link, Dan Stets

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.


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