Analysis: OPEC caution on output may help bring back $100 oil

LONDON Wed Dec 29, 2010 8:31am EST

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LONDON (Reuters) - Oil has burst above top exporter Saudi Arabia's preferred $70-$80 range and yet OPEC is unlikely to stop the rally, helping to prepare the way for the market to bound above $100 a barrel.

At meetings this month -- a full conference of the Organization of the Petroleum Exporting Countries in Quito and talks among Arab oil ministers in Cairo -- oil producers stood by OPEC's two-year-old set of output curbs.

Even prices of $100 -- not far above a 26-month high of $91.88 hit this week -- need not damage the economy and would not mean OPEC should pump more if they resulted from speculation rather than any shortage, ministers and officials have said.

"If it goes to $100 due to speculation, OPEC will not move," OPEC Secretary General Abdullah al-Badri said this month. He also said the organization did not want oil to rise that far.

Analysts are split into those who see fundamental strength as the world economy recovers, driving up fuel consumption, and those who focus on differences between today's relatively well-supplied market and that of 2008, when oil sped to its all-time high of nearly $150 a barrel.

"It remains to be seen whether prices are responding to short-term weather conditions or longer term demand and monetary issues," said Sadad al-Husseini, an oil analyst and former top official at Saudi state oil giant Saudi Aramco.

"Given the still abundant oil inventories, it wouldn't make sense for OPEC to over-react on what may be a very transient condition."

By the time any extra oil reached consumers, demand could be lower after the peak demand of the northern hemisphere winter.

That would add to oversupply in a market, which for all the nominal strength is still in contango for U.S. crude -- a structure in which a relatively cheap front-month contract encourages stock-building.

DEJA VU?

More bullish analysts say OPEC caution recalls its action ahead of the record bull run of 2008, when it was slow to add oil.

"The signal from the latest meeting in Quito was one in which the producers are still concerned about the downside," Barclays Capital said in a note.

"In our view, that means that the upside is more likely to be controlled reactively with a delay rather than pre-emptively."

It set its price forecast for U.S. crude to 2011 to $91 a barrel, adding that this average figure implied "a sustained period of trading above $100 at points during the year."

Husseini and many inside OPEC have said dollar-denominated oil is cheaper than it seems because the dollar has fallen.

"Prices have not yet risen to $100/barrel and there is nothing mysterious about $100/barrel," he said. "It equates to no more than $80/barrel in 2005 dollars, once current prices are corrected for inflation."

In nominal terms, oil has risen 35 percent from a low hit in May and this week's peak was around 15 percent above the price at the end of 2009.

The current rally set in around September after the U.S. Federal Reserve embarked on its latest quantitative easing, which has triggered a wave of buying across financial markets.

Barclays noted total commodity assets under management had reached an all-time high after investors piled in.

Data from U.S. regulator the Commodity Futures Trading Commission released this week showed money managers extended their net long crude oil positions to a record.

"The Fed has in a sense been pushing the speculators. OPEC can very well argue it's not its role to add more oil," said Olivier Jakob of Petromatrix.

Still oil's strength has been modest by comparison with commodities that face looming shortfalls, such as copper, which has touched a series of records.

As oil began to rise in September, traders were contemplating record fuel inventories in the United States, the world's biggest oil user.

Stocks have since fallen, although a deep draw in crude stockpiles could have been in part because of year-end tax positioning. The latest U.S. data will emerge late Wednesday and Thursday.

In addition to stocks, OPEC has significant spare capacity, which it has pegged at around 6 million barrels per day (bpd).

Iraq, which is exempt from the OPEC system of supply curbs as it recovers from war and sanctions, has huge scope to grow.

Analysts have disputed it can meet a capacity target of 12 million bpd in around seven years, but even a slower increase would provide much of the extra oil needed to meet any rise in demand.

Its new oil minister said it aimed to increase output to 3 million bpd by the end of 2011, up from around 2.6 million bpd.

A Reuters poll saw the call on OPEC, as opposed to non-OPEC oil, increasing by 600,000 bpd in 2011. Overall oil use would rise by 1.5 million bpd.

Absolute demand would hit a new high, but the rate of demand growth is slower than the record of 3 million bpd in 2004, according to figures from the International Energy Agency.

(Additional reporting by Dmitry Zhdannikov, editing by Anthony Barker)

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Comments (9)
Makati1 wrote:
It is no surprise as they cannot increase supplies like they once did. It is called “Peak Oil” and has now been admitted to have been reached, by even the US Military. $10 gas is not far off. Adjust.

And, they are correct, the shrinking dollar has a direct affect on the price of oil and all commodities. Get used to it! Just like a quart of milk used to cost $.10 when a dollar was worth a dollar, now oil costs will go up as the dollar value goes down. Americans may be fooled by the propaganda coming out of DC, but the rest of the world is not

Dec 29, 2010 9:37pm EST  --  Report as abuse
URKiddinRight wrote:
It’s a good thing the new Republican House will keep us from wasting more money on alternative energy. We need well-lobbied ideas like ethanol.

Dec 30, 2010 6:46am EST  --  Report as abuse
kc10man wrote:
Two weeks max before oil hits 100 again. The US and European economies may be relatively stagnant, but demand is growing in other places. 100 and above is our destiny. Time to get on the volt waiting list.

Dec 30, 2010 8:09am EST  --  Report as abuse
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