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News // Middle East and OPEC

OPEC to Maintain Production Quotas as Crude Exceeds $90

08 December 2010 , 08:34Bloomberg2597

The Organization of Petroleum Exporting Countries, which accounts for 40 percent of global supply, will maintain the limits set in 2008 when representatives gather in Quito on Dec. 11, according to all but one of 39 analysts and traders in a Bloomberg News survey. Ministers from Angola, Venezuela and Libya say the group will probably repeat its 24.845 million- barrel-a-day target.

New York crude futures climbed above $90 a barrel for the first time in 26 months yesterday, exceeding the $70-to-$90 range described by Saudi Arabian Oil Minister Ali al-Naimi as “comfortable.” Iran, Venezuela and Libya said this month they would accept prices as high as $100, while OPEC Secretary- General Abdalla El-Badri said the group won’t necessarily boost production unless there’s a need for more oil.

“I don’t think there’s a magic number that causes them to take action,” said Mike Wittner, head of oil market research at Societe Generale SA in New York. “As long as the economy seems OK, as long oil demand seems healthy, what they consider to be an acceptable range will move upward as prices move up.”

Two-Year High

Crude futures on the New York Mercantile Exchange advanced 12 percent this year, settling at $88.69 a barrel yesterday, after trading at $90.76, the highest level since Oct. 8, 2008. Prices will return to $100 a barrel for the first time in two years during 2011, according to strategists at Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co. and Bank of America Merrill Lynch.

OPEC hasn’t altered quotas at any of its six meetings since December 2008, when the group announced record supply cuts that have left the 12-member organization with about 6 million barrels a day of spare capacity, almost three times the daily output of Nigeria alone.

While oil consumption in China, the world’s biggest energy user, will increase by 9.8 percent this year, demand in North America will rise 2.1 percent, according to the Paris-based International Energy Agency. It will decline 0.9 percent in Europe’s most advanced economies, the IEA said.

Falling Stockpiles

“Fundamentally there’s no reason for OPEC to release more barrels,” said Johannes Benigni, chief executive officer of JBC Energy GmbH, a Vienna-based research consultant. “Surplus inventories are declining, but it’s not the strength of the physical market that’s causing oil to move to $90. This is more a function of the state of the economy and the financial markets.”

U.S. crude stockpiles have fallen by about 8.5 million barrels, or 2.3 percent, to 359.69 million barrels in the past month, according to Energy Department data. They peaked this year at 368.156 million barrels on Oct. 29 and are still 10 percent above their norm for the time of year, the data show.

OPEC abandoned a formal price target centered around $25 a barrel in early 2005. Since late 2008, most members have publicly backed Saudi Arabian King Abdulla's stance that $75 is a “fair price” for consumers and producers.

Al-Naimi said on Nov. 1 that crude between $70 and $90 a barrel was a “very comfortable zone,” raising the unofficial target from a previous range of $70 to $80 amid concern the weakening U.S. currency may hurt the value of members’ dollar- denominated oil revenue.

The Dollar Index, which tracks the currency against those of six major trading partners, dropped more than 7 percent from September through October. The U.S. Energy Department forecasts OPEC’s net oil export revenue at $748 billion this year.

Adhering to Quotas

Instead of changing quotas, OPEC is likely to focus on efforts to conform with production ceilings, according to Shokri Ghanem, chairman of Libya’s National Oil Corp. All 11 members that have limits still exceed them.

Adherence to quotas has faltered as oil demand recovered after the 2008 economic crisis, encouraging members to exceed their individual allocations. Compliance fell to 56 percent last month, from a peak of 89 percent in March 2009, according to monthly Bloomberg surveys of producers and analysts.

“The ministers could bring up the issue of cheating, but to what purpose?” said Peter Beutel, president of Cameron Hanover Inc., a trading-advisory company in New Canaan, Connecticut. “Why fix what clearly isn’t broken from their perspective? They are making good money and they see no genuine negative impact on consumption, although we know there is some.”

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.

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