Supply worries keep oil high despite OPEC increase

By Simon Webb - Analysis

VIENNA (Reuters) - OPEC has agreed to boost supply, oil demand growth is below forecast and there are concerns about the health of the economy, but oil remains stubbornly close to its record above $78 on concerns about supply.

U.S. crude traded just over 50 cents below its record high of $78.77 on Wednesday, after the Organization of the Petroleum Exporting Countries agreed at a meeting on Tuesday to boost output by 500,000 barrels per day (bpd) from November.

Investors are betting that consuming countries will swallow OPEC's increased supply and still need more oil during peak winter demand.

"The outlook is for the oil market to continue to tighten all the way through the fourth quarter and that's exactly what you are seeing reflected in the price," said Kevin Norrish of Barclays Capital.

"What happened at the OPEC meeting doesn't alter that perception one bit. The increase was relatively modest."

Due to the time it takes to produce and ship oil, the increased supply from OPEC will only start feeding into the market early next year, Norrish added.

NON-OPEC SUPPLY GROWTH LAGS

Oil producers outside OPEC have failed to start output from as many new oilfields as expected this year. The U.S. Energy Information Agency cut its forecast for non-OPEC supply growth by about 100,000 bpd for this year and next on Tuesday.

Oilfield maintenance will further tighten supply in the first half of November, when work in the United Arab Emirates is expected to cut supply by around 800,000 bpd.

"A 500,000 bpd increase would not put much of a dent in what looks to be tight fourth quarter fundamentals," said U.S. investment bank Lehman Brothers in a report.

Demand for OPEC oil and the call on stocks would grow twice that fast in the fourth quarter from the third, Lehman said.

Demand is expected to outpace supply in the fourth quarter and put a strain on the world's oil stocks, leaving less of a cushion to deal with any unexpected outages.

Barclays expected global oil stocks to fall by 2 million bpd during the fourth quarter, Norrish said.

"OPEC's meant to send a signal to top out the market," said Mike Rothman, senior managing director at the ISI Group.

"But the price remains dominated by fears about the availability of oil."

WORLD FINANCIAL TURMOIL

OPEC's agreement to increase supply came after months of pressure from consuming countries to pump more oil to help bring down the high price and prevent a sharp fall in stocks during winter.

The world's top oil exporter Saudi Arabia and its Gulf Arab neighbors convinced OPEC to make the gesture, but the producer group voiced its concern that turmoil in financial markets may crimp demand for its oil.

Financial markets have been thrown into turmoil since mid-August as concerns about a fallout from U.S. subprime mortgages triggered a sell-off in risky assets and a credit squeeze. If the economy slows in the United States, the world's largest energy consumer slows, so will oil demand.

The Paris-based International Energy Agency said that the credit crunch increased the risk that oil demand growth could decline next year.

The group cut its world oil demand growth forecast for the fourth quarter by 240,000 bpd to 2.35 million bpd on the year.

The agency, adviser to 26 industrialized countries, also said high prices could further curb consumption in 2008.