Opec increases crude oil output to control prices

Opec is increasing output at the fastest pace in two years, adding to near-record inventories and threatening speculators betting on US$100 ($134.83) crude with losses.

The number of options contracts to buy oil at US$100 by March almost quadrupled in October and increased another 5.9 per cent so far this month.

As traders piled in, Opec boosted production 4 per cent, or 1.1 million barrels a day, since March amid the worst global recession since World War II.

Saudi Arabia's King Abdullah has targeted US$75 oil as a fair price for consumers and producers and has the capacity to increase pumping by about 50 per cent, or four million barrels a day, enough for all of Brazil.

The prospect of more supply comes with inventories in industrial countries already the highest since 1998, when oil collapsed to US$10.

"It's not in Opec's interest to see US$100 oil," said Stephen Schork, president of consultant Schork Group Inc in Villanova, Pennsylvania.

"They know that it's the speculators that are the main driver in sending prices higher. At some point this market will implode, because this isn't sustainable."

Futures contracts show investors expect oil at US$80 in March 2010 and none of the Wall St analysts tracked by Bloomberg predict US$100 before the end of next year. Crude closed at US$79.43 yesterday on the New York Mercantile Exchange.

Oil, which has jumped 78 per cent this year, is heading for the biggest annual gain since 1999.

The appreciation coincided with a 5.4 per cent increase in US stockpiles to 335.9 million barrels.

The furthest-dated Nymex crude contract, for delivery in December 2017, closed at US$99.43 a barrel on November 4, before retreating.

The number of outstanding options contracts to buy oil at US$100 by March rose to 27,482 in October from 7181 in September, and climbed another 1609 to 29,091 by November 5. The contracts cover more than 29 million barrels of crude.

Inventories are mounting as the Organisation of Petroleum Exporting Countries produced 28.76 million barrels a day in October, up 80,000 from September and the highest in 10 months, according to Bloomberg estimates.

Saudi Arabia has raised shipments in four of the past six months, the data show.

State-run Saudi Arabian Oil will supply full contracted oil shipments to several refiners in Asia next month for the first time in more than a year, refinery officials said today.

"Listen to the Saudis," said Lawrence Eagles, the global head of commodities research at JPMorgan Chase in New York. "They have said they want prices at this level, and they have the ability to keep them here."

Saudi crude oil production has risen to 8.15 million barrels a day after dropping to 7.86 million in February, the lowest level since 2002. Even with the recent increases, October production was down 13 per cent from a year earlier.

The desert kingdom has idled about four million barrels a day, or one-third of its capacity, according to data from the country's oil ministry. Officials from the department didn't return calls seeking comment.

"The Saudis can close or open the valve and control the flow of oil at any time," said Robert Ebel, chairman of the energy and national security programme at the Centre for Strategic and International Studies in Washington.

"They realise it's not in their interest to see prices climb to an unacceptable level."

When prices were headed to a record US$147.27 last year, Saudi officials increased production by 500,000 barrels a day in June and July to halt the rally. By December 2008, prices collapsed as low as US$32.40.

"Prices are probably at the upper end of what they are comfortable with right now because they are concerned about the health of the global economy," said David Kirsch, an Overland Park, Missouri-based analyst with PFC Energy, an energy strategist to companies and governments.

Finance ministers and central bank governors of the Group of 20 nations said last week that while economic and financial conditions have improved, "the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern".

The US unemployment rate jumped to 10.2 per cent in October, the highest level since 1983, the Labour Department said last week.

Crude and fuel stockpiles held in non-government tanks in the 30 developed countries in the Organisation of Economic Co-operation and Development rose to 2.76 billion barrels in the third quarter, close to the record 2.77 billion reached in 1998, US Energy Department figures show.

The 1998 glut caused oil to collapse to US$10 a barrel. Now, with storage tanks bulging from Singapore to Oklahoma, traders are being forced to store oil and fuel on ships that are bigger than the Chrysler Building.

The amount of heating oil and jet fuel stored at sea increased 17 per cent to 112 tankers with a combined capacity of 13.1 million deadweight tonnes, London-based Simpson, Spence & Young, the world's second-largest shipbroker, said in a November 6 report.

Opec president Jose Maria Botelho de Vasconcelos said last month that the group may raise exports in December if prices remain above US$75.

Ministers are scheduled to meet on December 22 in Luanda, Angola, to review production quotas that the group left unchanged at three gatherings in 2009. Opec last agreed to increase supply targets in September 2007.

"We're getting noise from Opec and it's probably Saudi-inspired," said Bill O'Grady, chief market strategist at Confluence Investment Management in St Louis.

"They would probably like oil between US$65 and US$75 because that would be high enough for them and their friends to be fairly compensated."

Opec will hold a special meeting if oil prices reach US$100 a barrel, Kuwait's Oil Minister Sheikh Ahmad al-Abdullah al-Sabah said.

Rising equity prices and the weakening dollar have been reasons for oil's rally this year and will probably limit Opec's ability to dictate prices, according to Adam Sieminski, chief energy economist at Deutsche Bank in Washington.

"Things are still being driven by the dollar, which raises challenges for Opec," Sieminski said. "If oil makes a run toward the triple digits, they would traditionally put more oil on the market, but right now refiners have plenty on hand."

The dollar has dropped 7.7 per cent this year against a basket of six major currencies as the Fed, led by Chairman Ben Bernanke, cut rates to near zero in an effort to lift the US economy out of its worst recession since the 1930s.

"Prices are being held up by non-oil factors," Kirsch said. "The easiest way for Opec to lower prices would be for them to buy up dollars and Treasuries."

The falling dollar has hurt the buying power of oil exporters, according to Iran and Venezuela.

"It went to US$81 to US$82 for a few days but you can't believe that's what you're really getting," Iran's Opec governor, Mohammad Ali Khatibi, said. "You have to consider not only the current price, but the year-to-date average."

The benchmark crude price used by Opec, derived from the cost of oil produced by each of its 12 members, averaged US$41.54 barrel in January and was at US$76.25 on November 6.

"A floor of US$80 and stability" are Venezuela's goal for next year, the country's oil and energy minister, Rafael Ramirez, told reporters in Caracas.

"I do not think the current price is hindering the recovery of the world economy," Iraqi Oil Minister Hussain al-Shahristani said in an interview in Baghdad yesterday.

Iran pumped an average 444,000 barrels a day above its Opec target in October, making it the biggest quota-buster, according to data compiled by Bloomberg.

Venezuela produced 234,000 barrels more than its target.

"They are always looking for higher prices," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

"They let the Saudis do the work, while they pump as much as they can."

- BLOOMBERG