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Mon 13 Dec 2010 10:15 AM

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OPEC breaching its production limits the most since 2004

World’s biggest suppliers may be ready to pump more crude next year

OPEC breaching its production limits the most since 2004
OIL CARTEL: The Organisation of Petroleum Exporting Countries excluding Iraq pumped 26.78 million barrels a day this year (ITP Images - for illustrative purposes only)

OPEC is breaching its production
limits the most in six years, signaling the world’s biggest suppliers are ready
to pump more crude next year as oil rallies toward $100 a barrel.

The Organisation of Petroleum
Exporting Countries excluding Iraq pumped 26.78 million barrels a day this
year, exceeding the quotas by an average of 1.934 million a day, the highest
level since 2004, according to data compiled by Bloomberg. Crude rose 11
percent in 2010 as demand recovered, trading at about $90 for the first time in
two years. Options to buy at $100 next December are near a five-month high.

Flouting quotas lets OPEC, which
provides about 40 percent of the world’s oil, boost profits without changing
targets set when the first global recession since World War II caused prices to
tumble 78 percent. Analysts say the rally may lead the 12-member group to raise
output next year after leaving quotas unchanged at this weekend’s meeting in
Quito, Ecuador.

“Definitely $100, that would be a
trigger,” said Leo Drollas, the London-based director and chief economist at
the Centre for Global Energy Studies, a market researcher founded by former
Saudi oil minister Sheikh Ahmad Zaki Yamani. “Bells are ringing in the
corridors already. If this carries on, if it’s a really cold winter, we can see
prices heading up to $100. At some stage even the Saudis will realize there’s
something going on here, and that they should respond. And they will.”

OPEC has maintained a production
target of 24.845 million barrels a day since December 2008, the longest period
that quotas have stayed unchanged since they were first used in 1982. The 11
members with quotas pumped 26.7 million barrels a day last month, 1.9 million
more than targeted, Bloomberg data show.

Wall Street is raising its price
forecasts for next year after crude on the New York Mercantile Exchange reached
$90.76 a barrel on December 7, the highest level since Oct. 8, 2008. Futures
for January delivery settled at $87.79 a barrel on December 10. Oil is up 37
percent from this year’s low on May 20, though down 40 percent from the record
$147.27 on July 11, 2008.

Goldman Sachs Group said on December
1 that crude will average $100 in 2010 and $110 in 2012. In June last year,
Goldman had predicted oil would rally to $85 by the end of 2009, though that
level wasn’t attained until this April. JPMorgan Chase said on December 3 that oil
will average $93 in 2011, increasing its estimate from $89.75, and reach $120
before the end of 2012.

“OPEC will sequentially need higher
revenues to pay for increasing social, investment and energy costs,” analysts
at JPMorgan led by New York-based Lawrence Eagles wrote on December 3. “If the
world economy can bear it, they will allow the acceptable price range to step
up both in 2011 and 2012.”

Options that give investors the
right to buy December 2011 futures at $100 rose to $7.10 on December 7, the
highest price since August, according to Nymex data. They averaged $6.39 this
year. There are 44,981 outstanding contracts, the largest open interest for any
oil-options contract in New York.

Higher prices are a tax on consumers
that may stunt growth, Francisco Blanch, head of commodity research at Bank of
America-Merrill Lynch in New York, said in an Oct. 17 report. Every $10-a-barrel
increase adds $42bn to the cost of US imports, $49bn in Europe, $19bn for China
and $16bn to Japan, Blanch said.

“Within about two weeks of oil being
at $100, I think you would get more consumer-nation pressure on OPEC” to
increase production, said Ann-Louise Hittle, a senior analyst at Wood Mackenzie
in Boston. “Their number one concern is not to damage heavily the economic
recovery that is under way.”

Confidence among US consumers
increased more than forecast in December to the highest level in six months at
the same time Americans began stepping up holiday spending. The Thomson
Reuters/University of Michigan preliminary index of consumer sentiment rose to
74.2 from 71.6 in late November.

Stockpiles in Organisation for
Economic Cooperation and Development nations unexpectedly fell in the third
quarter, dropping 11.5 million barrels, according to the International Energy
Agency, compared with the five-year average gain of 38.6 million for that
period. Growth in demand last quarter was “giddy,” with North America
“remarkably strong,” the Paris- based agency said in a December 10 report.

“Against a backdrop of much
stronger-than-expected global oil demand growth and oil prices above two-year
highs, OPEC may come under pressure to increase supplies to the market in the
new year,” the IEA said in its monthly Oil Market Report.

The narrowing difference between
prices for futures of different maturities has pushed part of the market into
so- called backwardation, where crude for soonest delivery is more expensive
than for later months. That’s another sign dropping stockpiles will drive oil
higher, according to Adam Sieminski, chief energy economist at Deutsche Bank

Falling inventories make rallies
“more sustainable,” Washington-based Sieminski wrote December 3, raising his
2011 average forecast to $87.50 a barrel, from $80.

Crude for December 2011 delivery
closed at $89.79 a barrel on the Nymex on December 10, 84 cents higher than
December 2012 futures. It was 87 cents less than the 2012 contract on Nov. 30.

OPEC’s gathering in Quito two days
ago was the seventh meeting with no change in output quotas. The group meets
next in June. Asked what price level is appropriate, Saudi Arabian Oil Minister
Ali al-Naimi told reporters: “How many times do I have to tell you. $70 to $80
is a good price.”

An increase to $100 may indicate
“something wrong with fundamentals” in the market and lead OPEC to act, Abdalla
El- Badri, the organization’s secretary-general, said on December 9.

Venezuelan Energy Minister Rafael
Ramirez told reporters after the December 11 meeting ended that $100 is “fair”
and he expects oil to reach that level next year.

Higher prices rather than increased
production may help Iran, which can’t lift output as fast as other nations, and
Venezuela, whose heavy crude deposits make drilling more expensive, according
to Wood Mackenzie’s Hittle.

Iraq will account for 54 percent of
the increase in OPEC’s supply capacity in the six years ending 2015, according
to the IEA, replacing Iran as the biggest producer after Saudi Arabia.

Saudi Aramco, the world’s largest
state-owned oil company, will start pumping 500,000 barrels a day from its
Manifa field in 2013, Chief Executive Officer Khalid Al-Falih said in Dubai on December
8. The kingdom has the capacity to pump 12.08 million barrels a day, of which
it is now using 8.3 million barrels a day, IEA data show.

“I don’t think you’ll see Saudi
Arabia starting to eat out of the spare capacity until inventories go below the
five-year average or oil prices go above $100 a barrel,” said Torbjoern Kjus,
senior oil-market analyst at DnB NOR in Oslo.

OPEC’s members are Algeria, Angola,
Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United
Arab Emirates and Venezuela. Iraq is exempt from the quota system.

The group agreed on a record 4.2
million barrel-a-day supply cut at the end of 2008 in response to the
recession. Adherence to that pledge peaked at 89 percent in March 2009 and was
56 percent last month, according to Bloomberg estimates.

“They could raise the quotas by a
million and a half barrels a day and in theory it wouldn’t matter,” said
Sieminski. “It wouldn’t change anything. They’d still be producing more than
their targets.”


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