Oil Heads for Biggest Monthly Gain Since 1999 on OPEC Output

By Ben Sharples and Ann Koh

May 29 (Bloomberg) -- Crude oil headed for its biggest monthly gain in a decade after OPEC kept its output unchanged amid signs the global economy is recovering.

Oil has gained 27 percent in May as equities rose and the U.S. dollar weakened, spurring demand for commodities. Japan said today that its industrial output climbed the most in at least six years in April, improving the outlook for a rebound in fuel demand.

“Oil has followed equities primarily because investors have cash on hand on the sidelines,” Victor Shum, a senior principal at Purvin & Gertz Inc., said in Singapore. “They are counting on some of the positive economic indicators, and are placing bets.”

Crude oil for July delivery was at $65.20 a barrel, up 12 cents, on the New York Mercantile Exchange at 1:25 p.m. in Singapore. Yesterday, the contract rose $1.63, or 2.6 percent, to settle at $65.08 a barrel, the highest since Nov. 5.

Oil is poised for the largest increase since March 1999, when Asia was recovering from the 1997-1998 financial crisis and fuel demand started rising in China and India. Oil gained 37 percent, according to Bloomberg data.

Saudi Arabian Oil Minister Ali al-Naimi said that the Organization of Petroleum Exporting Countries opted not to alter its output targets because “prices are good, the market is in good shape.”

Dollar, Stocks

Crude should stay in a $60-to-$70 a barrel range for the rest of the year, OPEC Secretary General Abdalla el-Badri said. The Energy Department said yesterday that U.S. oil supplies fell the most since September.

“If we are able to keep this $60 to $70 price for the remainder of the year, it will be fine,” OPEC’s El-Badri said in a Bloomberg Television interview.

The dollar is set for the first decline in two months versus the euro, falling to $1.3987 per euro at 1:51 p.m. in Tokyo from $1.3941 in New York yesterday.

U.S. stocks rallied, led by banking and energy shares, as a rebound in 10-year Treasuries eased concern record government debt sales will trigger higher borrowing. The Standard & Poor’s 500 Index added 1.5 percent and the Dow Jones Industrial Average advanced 1.3 percent.

Japan’s factory production climbed 5.2 percent from March, when it gained 1.6 percent, the Trade Ministry said today in Tokyo. The increase was faster than the 3.3 percent expected by economists. Companies said they planned to increase output in May and June as well, the report showed.

U.S. Inventories

Oil jumped to a six-month high yesterday after the Energy Department weekly reported showed a drop in inventories.

U.S. crude inventories declined 5.41 million barrels to 363.1 million last week, according to the department. It was the biggest drop since September, when hurricanes hit the Gulf of Mexico coast. A 150,000-barrel reduction was forecast, according to the median of 12 analyst responses in a Bloomberg News survey.

The decline left inventories 27 percent higher than the five-year average, up from a 23 percent surplus a week earlier. Stockpiles were the highest since 1990 in the week ended May 1.

“The oil market fundamentals still remain relatively fragile, notwithstanding the gains in the oil price,” said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney.

Refineries operated at 85.1 percent of capacity, up 3.3 percentage points from the previous week, the biggest gain since October, the report showed.

Gasoline stockpiles dropped 537,000 barrels to 203.4 million, the lowest since the week ended Dec. 5, according to the report.

OPEC Limits

Gasoline for June delivery rose 0.2 cent, or 0.1 percent, to $1.9125 a gallon in New York at 12:51 p.m. in Singapore. It gained 1.88 cents, or 1 percent, to end yesterday’s session at $1.9105 in New York, the highest settlement since Oct. 13.

Saudi Arabia’s Al-Naimi forecast that oil may rise to $75 a barrel by this year’s third or fourth quarter. The group’s next meeting will be on Sept. 9, he said.

Other OPEC ministers said the group would work toward finishing previously announced reductions. OPEC has yet to complete output cuts totaling 4.2 million barrels a day agreed to last year.

“I don’t buy the story that we are going to go to $150 next week,” Jan Stuart, Macquarie Group Ltd.’s oil analyst in New York, said in an interview with Bloomberg Television. “What I do buy is that there is the beginning of a recovery.”

The production ceiling is 24.845 million barrels a day for 11 of its members. They pumped 25.812 million a day in April, a May 13 report from the group showed. Iraq has no quota.

Brent crude for July settlement was 11 cents higher at $64.50 a barrel on London’s ICE Futures Europe exchange at 1:31 p.m. Singapore time.

To contact the reporters on this story: Ben Sharples in Melbourne bsharples@bloomberg.net; Ann Koh in Singapore at akoh15@bloomberg.net