Crude Oil Rises After OPEC Chief Calls for Sizable Output Cuts

By Mark Shenk

Dec. 16 (Bloomberg) -- Crude oil rose for the first time in three days after OPEC Secretary-General Abdalla El-Badri said the group needs to make a “sizable” output cut at this week’s meeting in Algeria.

The Organization of Petroleum Exporting Countries will probably lower production targets by at least 2 million barrels a day, or 7.3 percent, at a meeting tomorrow in Oran, according to 18 of 33 analysts surveyed by Bloomberg News. Global stockpile levels are at 57 days of forward cover, higher than their five- year average, Kuwait’s Oil Minister Mohammed al-Olaim said.

“It looks like OPEC will come out with a strong statement at this week’s meeting and make significant cuts, with the assistance of Russia,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “The prospect of the cuts is causing people to rethink the market balance for next year.”

Crude oil for January delivery rose as much as 51 cents, or 1.2 percent, to $45.02 a barrel and was trading at $44.65 at 7:56 a.m. Singapore time on the New York Mercantile Exchange. The price has tumbled 70 percent from a record $147.27 on July 11. Yesterday, oil fell $1.77, or 3.8 percent, to $44.51 a barrel.

U.S. industrial production declined 0.6 percent in November, the third drop in four months, the Federal Reserve said yesterday in Washington.

U.S. fuel demand may drop further as manufacturing in the country declines. Chinese crude processing tumbled to the lowest in 15 months, a report showed.

Lower Demand

China’s refineries processed 27.27 million tons of crude last month, or 6.64 million barrels a day, as an economic slowdown cut demand, the China Mainland Marketing Research Co. said in a statement yesterday. That’s down 8.5 percent from 29.8 million tons in October. China is the second-biggest oil- consuming country, after the U.S.

“The demand side of the oil picture is looking gloomier after the release of the latest Chinese consumption numbers,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut.

The International Energy Agency, which coordinates energy policy in 28 developed countries, said in a Dec. 11 report that global oil demand will contract this year for the first time since 1983 and cut its outlook for 2009.

Consumption worldwide will shrink by 200,000 barrels a day, or 0.2 percent, to 85.8 million barrels a day in 2008, the IEA said in the monthly report. Next year consumption worldwide will increase by 400,000 barrels a day, or 0.5 percent, to 86.3 million barrels a day, the report showed. That was down 200,000 barrels a day from November’s forecast.

4 Million Barrels

“OPEC will have to cut 4 million barrels a day at a minimum, given the drop in demand and because of non-OPEC production, to stop the fall in prices,” said economist Philip Verleger, president of PKVerleger LLC in Aspen, Colorado.

Global stockpiles can meet 57 days of world demand, five days more than the five-year average, OPEC President Chakib Khelil said.

“Stocks are very high, we need to take action at this time,” El-Badri told reporters when he arrived at his hotel in Oran yesterday. The oil market has 100 million barrels in excess stockpiles, he said.

The group, which agreed in October to reduce production by 1.5 million barrels a day starting Nov. 1, has implemented 75 percent of the cut, Khelil, who is also Algeria’s oil minister, told reporters in Oran.

“Everybody supports the cuts, I don’t have any doubts about it,” Khelil said. “The Saudis have reduced their supply to the market by 8 percent, which has had an effect on the market.”

Russian Request

OPEC is asking Russia, the second-largest producer after Saudi Arabia, to reduce oil output by 200,000 to 300,000 barrels a day to help revive prices, OAO Lukoil Chief Executive Officer Vagit Alekperov said in Moscow yesterday. Alekperov and Russia’s Deputy Prime Minister Igor Sechin are attending the meeting.

“In addition to an OPEC cut of 4 million barrels, Russia will have to cut by 400,000 barrels to support prices, and I don’t think either of these will happen,” Verleger, said.

Oil options volatility jumped to a record yesterday ahead of today’s expiration, as January futures traded above $50 a barrel and then collapsed to below $45 amid speculation on the impact of an OPEC production cut.

Brent crude oil for January settlement declined $1.81, or 3.9 percent, to settle at $44.60 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.