Bloomberg News

Crude Oil Futures Rise as OPEC Fails to Agree on Output Quotas

June 09, 2011

June 9 (Bloomberg) -- Crude oil increased to a one-week high after OPEC’s failure to reach an accord on output targets for the first time in at least 20 years.

Futures gained 1.2 percent following what Saudi Oil Minister Ali al-Naimi said “was one of the worst meetings we’ve ever had.” Ministers from the 12-nation Organization of Petroleum Exporting Countries were unable to come to an accord in five hours of talks in Vienna yesterday. Prices also rose as the U.S. trade deficit narrowed in April.

“OPEC’s failure to come to an agreement is still hanging over the market,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “There was a short pullback upon release of the jobs numbers, but that was quickly overshadowed by the falling trade deficit.”

Crude oil for July delivery rose $1.19 to $101.93 a barrel on the New York Mercantile Exchange, the highest settlement since May 31. Prices are up 37 percent in the past year.

Brent crude oil for July delivery increased $1.72, or 1.5 percent, to end the session at $119.57 a barrel on the London- based ICE Futures Europe exchange. It was the highest settlement since May 4. Brent, the European benchmark, traded at a record premium of $17.64 a barrel to U.S. futures.

U.S. jobless claims climbed by 1,000 to 427,000 last week, Labor Department figures showed today in Washington. The number of people on unemployment benefit rolls and those receiving extended payments decreased. The trade deficit shrank 6.7 percent to $43.7 billion, the lowest level since December, Commerce Department figures showed today in Washington.

Stock Market

U.S. equities rose for the first time in seven days on the trade deficit data. The Standard & Poor’s 500 Index advanced 1.1 percent to 1,293.80, and the Dow Jones Industrial Average climbed 125.18 points to 12,174.12 at 3:09 p.m.

Saudi Arabia, OPEC’s biggest producer, Kuwait, Qatar and the United Arab Emirates were ready to supply more oil to the market, al-Naimi said yesterday in Vienna. The four nations proposed a 1.5 million-barrel-a-day increase.

Libya, Angola, Ecuador, Algeria, Iran and Venezuela were opposed to higher limits, according to al-Naimi. Iraq is exempt from the targets. The 11 members subject to quotas produced 26.22 million barrels a day last month, 1.375 million more than pledged, according to Bloomberg News estimates.

“The people asking for an increase in production targets were the only ones capable of increasing output,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Rumors that there would be a substantial increase in quotas are the primary reason the market reacted the way it did. This will have no impact on actual supply.”

Quota System

OPEC’s quota system has been weakened by the need to replace Libya’s lost oil, the group’s secretary-general said after yesterday’s divided meeting. A rebellion against Libyan leader Muammar Qaddafi has cut production in the North African country by almost 90 percent, according to Bloomberg estimates.

“I don’t want to say it is dead,” Abdalla el-Badri said today in Vienna, referring to the group’s production target. “It is there, but we have to see how to replace Libya.”

The International Energy Agency said it was disappointed that OPEC failed to agree on an increase in output, according to a statement e-mailed yesterday. “Ongoing supply disruptions, as well as the fragile state of the global economy, call for a prompt increase in supply,” the Paris-based group said. The agency advises 28 of the wealthiest nations on energy policy.

Bullish Sentiment

“The sentiment turned bullish on OPEC’s non-decision yesterday,” said Carl Larry, director of energy derivatives and research with Blue Ocean Brokerage LLC in New York. “Once we get to the $104-$105 area, you’ll probably see a selloff. We’re still stuck in a range, and when we hit the higher end of it concerns are raised about demand destruction.”

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

U.S. gasoline demand fell 2.8 percent to 9.16 million barrels a day last week, leaving consumption 0.3 percent lower than a year earlier, according to an Energy Department report yesterday. Total fuel use climbed 0.5 percent to 19.2 million barrels a day, down 1.4 percent from the same week last year.

“We’re still getting a bit of follow-through from yesterday’s OPEC meeting and the U.S. inventory draw of nearly 5 million barrels,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “This has raised concerns about tightness later this year.”

U.S. crude-oil stockpiles decreased 4.85 million barrels to 369 million last week, the biggest decline this year, according to yesterday’s Energy Department report.

Oil volume in electronic trading on the Nymex was 726,989 contracts as of 3:08 p.m. in New York. Volume totaled 1.05 million contracts yesterday, the most since May 6 and 58 percent above the average of the past three months. Open interest was 1.53 million contracts.

--With assistance Lananh Nguyen 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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