Oil Extends Gains Before OPEC Meets to Discuss Production Cuts

By Mark Shenk and Samantha Zee

Oct. 24 (Bloomberg) -- Crude oil rose for a second day on speculation OPEC will agree to cut production to stem a slump of more than 50 percent in prices from July's record.

Venezuela and Iran are among members to have called for a cut at today's meeting in Vienna. OPEC President Chakib Khelil said there is a consensus to trim output without agreement on the size of the reduction. Oil is poised to drop for a fourth week, the longest losing streak since January last year.

``If OPEC makes a cut of 1 to 2 million barrels, prices should firm up and move higher in the short term,'' said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut. ``Unless there is something huge announced, the market will eventually start moving lower again because of the weak economy.''

Crude oil for December delivery rose $1.44, or 2.1 percent, to $69.28 a barrel at 8 a.m. Singapore time on the New York Mercantile Exchange. Prices are down 20 percent from a year ago and 3.6 percent this week. Yesterday, crude rose $1.09, or 1.6 percent, to $67.84 a barrel in New York.

Oil has dropped from the record $147.27 a barrel touched July 11 because of concerns slowing economic growth will curb demand. China, the world's fastest-growing energy consumer, said Oct. 20 its economy expanded at 9 percent in the third quarter, the slowest pace in five years. Concern a deepening global slump will damp profits has pushed the MSCI World Index 4 percent lower this week.

`Bear Market'

``Prices have fallen a great deal, so a gain should be expected,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. ``I think we are in a bear market where every rally will be followed by a move to a new low.''

Oil has lost its appeal among investors as a hedge against inflation, along with other commodities, as the U.S. dollar advances. The euro has fallen 20 percent versus the dollar since July 15.

Prices dipped during trading yesterday after Saudi Arabian Oil Minister Ali al-Naimi declined to express his support for a possible cut, on his arrival in Vienna. Saudi Arabia and Iran are the Organization of Petroleum Exporting Countries' two biggest producers.

``Who said anything about a cut?'' al-Naimi said when asked whether he supports the possibility of the group agreeing to reduce output. ``Prices will be determined by the market.''

`Balance' the Market

OPEC should cut production by 2 million barrels a day to stem the slump in prices and ``balance'' the market, Iranian Oil Minister Gholamhossein Nozari said earlier.

OPEC needs to lower production to restore equilibrium after the exit of speculators from the market hastened oil's drop from July's record, said Khelil, who is also Algeria's oil minister.

The group has asked Russia and other non-OPEC suppliers to trim output, he said. He wasn't confident Russia would respond, he added.

``If the Saudis don't play ball, it doesn't matter what OPEC decides,'' said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. ``Without Saudi support and compliance with a production cut, the cartel doesn't even need to meet. It will have an immaterial impact on production and price.''

The group needs to avoid a buildup in crude inventories that could cause a collapse in oil prices next year, Edmonds said. OPEC should evaluate whether a further cut is needed when it meets in Algeria in December, Venezuelan Oil Minister Rafael Ramirez said yesterday.

The United Arab Emirates, OPEC's third-biggest producer, is ``very concerned about the steep decline'' in prices, Oil Minister Mohamed al-Hamli said.

OPEC leaders are scheduled to meet in Vienna today at 9 a.m. local time.

The last time OPEC lowered quotas was at a December 2006 meeting in Abuja, Nigeria. The 500,000 barrel-a-day cut took effect in February 2007, expanding an earlier reduction agreed to in October. The cuts were reversed later in 2007 as prices rose.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net; Samantha Zee in Los Angeles at szee@bloomberg.net.