Bloomberg News

Oil Rises to a One-Week High After OPEC Fails to Reach Accord

June 08, 2011

June 8 (Bloomberg) -- Oil rose to a one-week high in New York after OPEC failed to reach an agreement on production targets for the first time in at least 20 years at its meeting in Vienna today.

Futures gained 1.7 percent after Mohammad Aliabadi, the acting Iranian oil minister and OPEC president, said the group will maintain current output for now. A Gulf delegate said yesterday that the Organization of Petroleum Exporting Countries was going to increase quotas. A U.S. government report showed a larger-than-forecast drop in oil supplies.

“The market is higher because OPEC failed to raise production today and we got a bigger-than-expected fall in inventories,” said Kyle Cooper, director of research at IAF Advisors in Houston. “You’re seeing the big reaction to the OPEC news because a quota increase has been expected.”

Crude oil for July delivery rose $1.65 to $100.74 a barrel on the New York Mercantile Exchange, the highest settlement since May 31. Prices are up 40 percent in the past year.

Brent crude oil for July delivery climbed $1.07, or 0.9 percent, to end the session at $117.85 a barrel on the London- based ICE Futures Europe exchange. It was the highest settlement since May 4.

Saudi Arabian Oil Minister Ali Al-Naimi, representing OPEC’s biggest producer, said his country is ready to supply whatever the market needs.

“It was one of the worst meetings we’ve ever had,” al- Naimi told reporters. “We were unable to reach an agreement.”

Proposed Increase

Saudi Arabia, together with Kuwait, Qatar and the United Arab Emirates, were ready to supply more oil to the market, al- Naimi said. The four nations proposed a 1.5 million-barrel-a-day increase from the current 28.8 million. That would have meant output of 30.3 million barrels a day, he said.

Libya, Angola, Ecuador, Algeria, Iran and Venezuela were opposed to an increase, Naimi said.

“More oil is going to quietly come out of the Gulf,” said Rick Mueller, a principal with ESAI Energy, LLC in Wakefield, Massachusetts. “They are concerned about rising demand in the third and fourth quarters and don’t want to see the market starved and see prices rise to such a high level that they hurt economic growth.”

Global oil demand will climb to 89.18 million barrels a day during the third quarter, the highest level of 2011, the U.S. Energy Department said yesterday.

OPEC’s failure to agree to increase quotas shows that some of the group’s members have limited spare capacity, JPMorgan Chase & Co. said.

$130 Oil

It will be a “stretch” for Saudi Arabia to add on its own the 1.9 million barrels a day of production needed to meet the 30.87 million demand OPEC forecasts for its oil in the third quarter, JPMorgan analysts including Lawrence Eagles wrote in a note today. The bank reiterated its forecast that oil will reach $130 a barrel this year.

“The knee-jerk reaction to the OPEC news is probably a little overdone,” said Carl Larry, director of energy derivatives and research with Blue Ocean Brokerage LLC in New York. “It does show that there’s dissension among the members. We’re trading more on the political implications of the meeting than any changes in physical oil supply.”

OPEC’s failure to reach a decision on targets shows Iran has increased its stature within the group, according to Petromatrix GmbH. Iran has replaced Saudi Arabia as the most influential member, Olivier Jakob, managing director of the Geneva-based research group, said today in an interview.

Contentious Meeting

“This has got be one of their most contentious meetings ever,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “You would have thought they would have at least legalized the cheating that’s already taken place.”

The 11 members with quotas, all except Iraq, produced 26.22 million barrels a day last month, 1.375 million above their target, according to Bloomberg News estimates.

“OPEC has been operating well above their allocation levels for some time, over 1.3 million barrels a day above, even with Libya production off the market,” said David Greely, head of energy research at Goldman Sachs Group Inc. in New York. “The allocation levels have had little connection to actual production levels for some time.”

Oil in New York has traded between $95.02 and $104.60 since May 9.

“The bottom line is that we’re still in a $95-to-$105 range,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “Everything that happens within the range is just noise. We’ll need a crisis to get above $105, and the failure of OPEC to come to an agreement is not a crisis.”

U.S. Inventories

The lack of an OPEC agreement overshadowed an Energy Department report that oil supplies fell more than expected.

Stockpiles decreased 4.85 million barrels to 369 million last week, the biggest decline this year, according to the Energy Department. A 1.38 million-barrel inventory drop was forecast, according to the median of responses in a Bloomberg News survey of 14 analysts.

Oil volume in electronic trading on the Nymex was 954,622 contracts as of 3:17 p.m. in New York. Volume totaled 862,816 contracts yesterday, 30 percent above the average of the past three months. Open interest was 1.52 million contracts.

--With assistance from Grant Smith and Ayesha Daya in Vienna and Sherry Su in London. Editors: Joe Link, Dan Stets

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

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


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