Oil Rises as Saudis Say They Delivered Promised Output Cuts
By Mark Shenk
Dec. 11 (Bloomberg) -- Crude oil jumped 11 percent, the biggest gain in 11 weeks, after the Saudi Arabian oil minister said he had delivered the output cuts promised to OPEC, a sign that world supplies are smaller than traders had estimated.
Ali al-Naimi, the Saudi minister, said in an interview in Poznan, Poland, that the kingdom pumped 8.493 million barrels of oil a day in November, close to its OPEC production quota of 8.477 million barrels a day. That’s 287,000 barrels a day less than estimated by the International Energy Agency.
“It’s quite unusual for the Saudis to make this kind of statement, and it should give confidence that they are following through with the cuts,” said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $5 billion energy-company bond portfolio. “This may encourage others to behave similarly to end the free-fall in prices.”
Crude oil for January delivery rose $4.74 to $48.26 a barrel at 12:55 p.m. on the New York Mercantile Exchange. Futures are heading for the biggest gain since Sept. 22. Oil is up 18 percent so far this week, the largest one-week gain since June 1998, when OPEC slashed output by more than 3.1 million barrels a day.
Saudi Arabia’s oil production was “absolutely” in line with its OPEC quota, al-Naimi said today in an interview in Poznan, where he is attending climate-protection talks. He declined to comment further on OPEC policy.
“The Saudis might have been impatient with the market’s skepticism, so they’ve decided some transparency is needed,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It shows they’re deadly serious about cutting already and serious about cutting more.”
Further Reduction
OPEC’s previous oil-supply cuts aren’t enough, and the group will need to make a “substantial” additional reduction at its next meeting, on Dec. 17, in Oran, Algeria, Shokri Ghanem, Libya’s top oil official, said in a Bloomberg TV interview today.
“The Oran meeting will decide a severe production cut to stabilize the oil market,” OPEC President Chakib Khelil, who is also Algeria’s oil minister, said in an interview on state radio today. “There is a consensus to reduce production.”
Oil has tumbled 26 percent since the Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s oil, announced a 1.5 million-barrel-a-day output cut on Oct. 24 in Vienna. Prices fell as fuel demand slumped and speculation grew that some members weren’t complying with their agreed-on quotas.
“The OPEC heavyweights are all serious about getting prices higher, so they will make the cuts,” said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts.
Russia’s Option
Russian President Dmitry Medvedev said his country, the second-biggest oil producer, may join OPEC and reduce output to support prices, RIA Novosti reported from Kurgan, Russia.
Futures, which have dropped 53 percent this year, are heading for the biggest annual decline since trading began in 1983, as global economies falter.
Oil for delivery in December 2009 traded at an $11.35 premium to January futures, down from a $14.27 premium on Dec. 8. The shrinking spread may indicate that storage space for oil is scarce and that the crude is being sold on the spot market, said Stephen Schork, president of the Schork Group, an energy markets analysis company in Philadelphia.
This price structure, when the subsequent month’s price is higher than the one before it, is known as a contango.
“You are starting to see a shift in the curve,” Schork said. “You are starting to see a return of demand to the front of the board.”
Inventories Climb
Contango trading encourages companies to increase stockpiles. U.S. crude-oil supplies rose in 10 of the past 11 weeks, according to the Energy Department.
Oil also advanced because the dollar dropped to a seven-week low against the euro. A weaker U.S. currency increases demand for commodities as a hedge and makes raw materials cheaper for buyers with euros, yen or sterling. The dollar weakened 2.9 percent to $1.3395 per euro, from $1.3023 yesterday.
“The weaker dollar and the likelihood of a significant OPEC cut is sending the market higher,” said Peter Beutel, president Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “These are the strongest reasons we’ve seen for a rally since prices started to slide in July.”
The Paris-based IEA, an adviser to 28 nations, said global oil demand will contract this year for the first time since 1983 and reduced its outlook for 2009.
Consumption worldwide will shrink in 2008 by 200,000 barrels a day, or 0.2 percent, the IEA said in a monthly report today. The reduction in demand is concentrated in developed economies in the Organization for Economic Cooperation and Development, where oil use will tumble 3.3 percent. Next year’s growth may be wiped out if the economic slump deepens, the agency said.
Brent crude oil for January settlement increased $5.15, or 12 percent, to $47.55 a barrel on London’s ICE Futures Europe exchange.
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.
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