OPEC to hold quota as prices near $75

Record supply cuts OPEC announced in late 2008 led to a 61 per cent jump in prices this year and the group forecasts oil demand will climb one per cent in 2010 as the economy recovers. With International Energy Agency statistics showing supplies still “well above” their five-year average in North America and Europe, analysts doubt OPEC members would approve an increase in supplies. Oil in New York traded near $73 recently.

“The economy appears to be improving, so nobody wants to rock the boat,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “Most OPEC members are happy with oil in the $70- to $80-a-barrel level.” Officials from Kuwait, Algeria, Libya and Qatar said during the past two weeks they want OPEC to maintain production targets at its gathering in Luanda, the Angolan capital. Saudi Arabia, OPEC’s biggest producer, said earlier this month that current prices near $75 are “close to the target.”

“What they will do is to rollover and to wait for 2010 to see very closely what is the reaction of the market,” Qatari Oil Minister Abdullah bin Hamad al-Attiyah said in Kuwait City on December 14. “We have always said a price between $70 and $80 is suitable.”

OPEC expects demand for crude from its 12 members will rise by 30,000 barrels a day next year to 28.61 million a day as the global economy shakes off its worst crisis since World War II, the group’s Vienna-based secretariat said in a monthly report on December 15.

“OPEC is feeling flush with success,” said John Kilduff, a partner at Round Earth Capital, a New York-based hedge fund. “I would expect the typical rhetoric urging members to adhere to their quotas and threats of further cutbacks in the first quarter.”

The group kept production targets unchanged in 2009, saying that it didn’t want to upset the economic recovery by further restricting oil supply. U.S. crude oil inventories have fallen 11 per cent from their peak in May to 332 million barrels, according to the Energy Department.

“Inventories are coming down, the price is perfect, and all investors, consumers, producers, they’re all very happy,” Saudi Arabian Oil Minister Ali al-Naimi said recently in Cairo, where Arab oil ministers held an annual meeting.

Oil futures on the New York Mercantile Exchange closed at $75.47 on December 4, the day before al-Naimi spoke, and have fluctuated between $68.59 and $79.04 so far this month.

“The Saudis aren’t interested in prices that are materially higher than what we have now, which could choke off the economic recovery,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “I doubt they have much sympathy for members such as Venezuela and Iran that need higher prices for budgetary reasons.”

The rebound in prices since April has encouraged members to pump in excess of their targets, even as ministers urge stricter adherence to cuts of 4.2 million barrels a day announced last year. Last month the group delivered only 58 per cent of the planned reductions, according to the Paris-based International Energy Agency.

Angola, whose oil minister Jose Maria Botelho de Vasconcelos holds OPEC’s rotating presidency, is among the countries violating their quotas the most.

“We will keep the decisions that were taken in the past about production quotas and maintain the quotas unchanged,” Botelho de Vasconcelos told Angolan broadcaster Radio Ecclesia recently, referring to next week’s meeting.

Africa’s two largest oil producers, Angola and Nigeria, haven’t implemented any of their promised OPEC cuts, according to IEA estimates of November output. Iran, the group’s second- largest producer, has completed 20 per cent. The United Arab Emirates was the only nation last month to adhere to its pledge, IEA data show.

Should expectations of higher interest rates support the U.S. dollar next year and choke off investments into alternative assets such as commodities, OPEC’s extra oil may frustrate the group’s efforts to maintain $75 oil, said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt.

OPEC’s oil-export revenue will fall 40 per cent to $575 billion this year, according to the U.S. Energy Department. After Luanda, the organisation’s next conference is scheduled for March 17 in Vienna, when Ecuador, its newest member, will hold the rotating presidency.

“There are concerns about compliance and inventories, but they will probably wait until March to address those issues,” Sieminski said.

The Bloomberg survey comprised 36 energy analysts, brokers and investors from Singapore to New York. OPEC’s members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

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