Crude Oil Set for Two-Week Decline After OPEC Cuts Forecast

By Mark Shenk and Samantha Zee

Jan. 16 (Bloomberg) -- Crude oil traded little changed, set for a two-week decline of more than 20 percent, after OPEC said demand will drop this year.

Consumption of OPEC crude will shrink 4.2 percent to 29.5 million barrels a day, according to the group’s monthly report released yesterday. The discount of oil in New York to the Brent grade in London widened to as much as $10.79 a barrel yesterday, a record, because of rising supplies at Cushing, Oklahoma, the delivery point for barrels traded on the U.S. exchange.

“The overriding factor impacting the market is the fact that we are in the midst of a global recession, which is buffeting the U.S., even China,” said Rachel Ziemba, an analyst at RGE Monitor, an economic research company in New York. “That’s going to be a negative for oil demand.”

Crude oil for February delivery was at $35.59 a barrel, up 19 cents, on the New York Mercantile Exchange at 9:16 a.m. Singapore time after falling as much as 27 cents, or 0.8 percent, to $35.13. Yesterday, futures dropped $1.88, or 5 percent, to $35.40 a barrel, the lowest settlement since Dec. 24. Prices are down 62 percent from a year ago.

Brent crude oil for February settlement declined 39 cents, or 0.9 percent, to settle at $44.69 a barrel on London’s ICE Futures Europe exchange yesterday. The more-active March Brent contract rose 6 cents to $47.68 a barrel.

Crude-oil inventories at Cushing, Oklahoma, where West Texas Intermediate traded on the Nymex is stored, climbed 2.5 percent to 33 million barrels last week, the Energy Department said earlier this week. It was the highest since at least April 2004, when the department began keeping records for the location.

$50 WTI

“On average, we expect prices to be around $50 for WTI and Brent” this year, Francisco Blanch, head of commodities research at Merrill Lynch & Co. in London, said on Bloomberg television. “We’ve made no distinction even though the WTI market does seem oversupplied due to a number of issues around the Cushing area.”

The price of oil for delivery next December is 65 percent higher than for the front-month contract, allowing traders to profit if they can store crude. February 2009 crude ended the day at a $8.14 discount to March, from $3.88 on Jan. 5. This structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

“The front end of the Nymex is weighed down by all of the oil at Cushing,” said Tom Bentz, senior energy analyst at BNP Paribas in New York. “WTI is the weakest crude grade out there right now.”

Reduced Demand

The Organization of Petroleum Exporting Countries shaved its global demand estimate for 2009 by 20,000 barrels to 85.66 million barrels a day. That brings this year’s reduction to 180,000 barrels a day, or 0.2 percent.

“Consumption could start to stabilize and potentially start to recover a little bit toward the end of this year, maybe early into next year,” Blanch said. “Of course, this is very dependent on fiscal and monetary policies starting to yield the expected result, which is some stimulus to economic activity.”

There will be a “major contraction” in demand among members of the Organization for Economic Cooperation and Development, with the United States being the “main contributor,” to this reduction, OPEC said.

U.S. fuel demand fell 6 percent last year, the biggest drop since 1980, as prices touched records and the economy contracted, the industry-funded American Petroleum Institute said yesterday.

U.S. crude stockpiles increased 1.14 million barrels to 326.6 million barrels last week, the highest since Aug. 31, 2007, the Energy Department said Jan. 14. Gasoline and distillate fuel supplies also rose.

Morgan Stanley is seeking a supertanker to store crude oil, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from higher prices later in the year, four shipbrokers said. Frontline Ltd., the world’s biggest owner of supertankers, said Jan. 14 about 80 million barrels of crude oil is being stored in tankers, the most in 20 years.

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