Oil Rises a Second Day as OPEC Signals Deeper Production Cuts

By Christian Schmollinger

Jan. 14 (Bloomberg) -- Crude oil rose for a second day in New York after OPEC leaders signaled their intention to make deeper supply cuts to bolster prices.

OPEC is willing to reduce crude production again to “preserve the price of oil,” Venezuelan President Hugo Chavez said yesterday in Caracas. Saudi Arabia Oil Minister Ali al- Naimi said the kingdom’s February output will be “lower than the target” set at the group’s Dec. 17 meeting.

“These comments from the OPEC countries are supportive for the market and keep prices from losing ground,” said Ken Hasegawa, a commodity derivatives sales manager at Newedge Group in Tokyo. “We need time to see how effective the production cuts will be over the next one or two months.”

Crude oil for February delivery rose as much as $1.47, or 3.9 percent, to $39.25 a barrel and was at $38.94 at 9:38 a.m. Singapore time on the New York Mercantile Exchange. Yesterday, futures rose 19 cents, or 0.5 percent, to settle at $37.78 a barrel. Oil is down 59 percent from a year ago.

“We will do what it takes to bring the market in balance,” al-Naimi said as he arrived in New Delhi yesterday for a conference. The country is currently producing 8 million barrels a day, about level with its 8.051 million barrel-a-day allocation.

Oil ministers from the Organization of Petroleum Exporting Countries agreed in Oran, Algeria, to cut supply by 9 percent to 24.845 million barrels a day starting Jan. 1.

Further Reduction

“We’re willing to cut 2 million more, 4 million more barrels to preserve the price of oil,” Chavez said in a speech to the National Assembly in Caracas.

The group needs to make the deepest supply reductions in its history to comply with the new target. The 11 OPEC nations with quotas produced an average of 27.45 million barrels a day in December, according to data compiled by Bloomberg News.

The U.S. economy will contract 1.5 percent this year, a half percentage point more than projected last month, according to the median of 59 forecasts in a survey taken from Jan. 5 to Jan. 12 by Bloomberg News.

“The economy needs some time to rebound,” said Newedge’s Hasegawa. “Without this, the strength in crude oil will not be sustained and it’s possible we may head toward $35, especially for February WTI.”

U.S. Stockpiles

Falling demand for raw materials has hit most commodity markets. The Reuters/Jefferies CRB Index of 19 raw materials has declined 53 percent since reaching a record in July. The gauge rose 1.64, or 0.7 percent, to 222.19 yesterday.

Brent crude oil for February settlement gained as much as 27 cents, or 0.6 percent, to $45.10 a barrel on London’s ICE Futures Europe exchange. It rose $1.92, or 4.5 percent, to settle at $44.83 a barrel yesterday. The contract expires tomorrow.

The more active March future was at $47.68 a barrel, up 24 cents, at 9:44 a.m. Singapore time.

U.S. crude-oil stockpiles probably gained 2.75 million barrels in the week ended Jan. 9, according to the median of 14 responses by analysts in a Bloomberg News survey. The department will release its weekly petroleum supply report today.

Inventories of gasoline and distillate fuel, a category that includes heating oil and diesel, rose, according to the Bloomberg News survey.

The price of oil for delivery next December is 55 percent more than for February, allowing traders to profit if they have the ability to store crude. This structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

“This situation has now created a $10 difference between the first three months contract’s and this has given an incentive for traders to store oil as much as possible,” said Hasegawa.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.