Oil at $100 Doesn’t Compute as OPEC Output Pace Grows

By Mark Shenk

Nov. 9 (Bloomberg) -- OPEC is increasing output at the fastest pace in two years, adding to near-record inventories and threatening speculators betting on $100 crude with losses.

The number of options contracts to buy oil at $100 by March almost quadrupled in October and increased another 5.9 percent so far this month. As traders piled in, OPEC boosted production 4 percent, or 1.1 million barrels a day, since March amid the worst global recession since World War II.

Saudi Arabia’s King Abdullah has targeted $75 oil as a fair price for consumers and producers and has the capacity to increase pumping by about 50 percent, or 4 million barrels a day, enough for all of Brazil. The prospect of more supply comes with inventories in industrial countries already the highest since 1998, when oil collapsed to $10.

“It’s not in OPEC’s interest to see $100 oil,” said Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania. “They know that it’s the speculators that are the main driver in sending prices higher. At some point this market will implode, because this isn’t sustainable.”

Futures contracts show investors expect oil at $79 in March and none of the Wall Street analysts tracked by Bloomberg predict $100 before the end of next year. Crude closed at $77.43 last week on the New York Mercantile Exchange.

Oil, which has jumped 74 percent this year, is headed for the biggest annual gain since 1999. The appreciation coincided with a 5.4 percent increase in U.S. stockpiles to 335.9 million barrels.

Ida Boosts Crude

Crude oil rose from a one-week low today as the approach of Hurricane Ida shut some output in the Gulf of Mexico. Oil for December gained as much as 95 cents, or 1.2 percent, to $78.38 a barrel in after-hours electronic trading on the New York Mercantile Exchange and was at $78.28 at 11:38 a.m. in Singapore.

The number of outstanding options contracts to buy oil at $100 by March rose to 27,482 in October from 7,181 in September, and climbed another 1,609 to 29,091 by Nov. 5. The contracts cover more than 29 million barrels of crude.

Inventories are mounting as the Organization of Petroleum Exporting Countries produced 28.76 million barrels a day in October, up 80,000 from September and the highest in 10 months, according to data compiled by Bloomberg. Saudi Arabia has raised shipments in four of the past six months, the data show.

“Listen to the Saudis,” said Lawrence Eagles, the global head of commodities research at JPMorgan Chase & Co. in New York. “They have said they want prices at this level, and they have the ability to keep them here.”

Saudi Output

Saudi crude-oil production has risen to 8.15 million barrels a day after dropping to 7.86 million in February, the lowest level since 2002. Even with the recent increases, October production was down 13 percent from a year earlier.

The desert kingdom has idled about 4 million barrels a day, or one-third of its capacity, according to data from the country’s oil ministry. Officials from the department didn’t return calls seeking comment.

“The Saudis can close or open the valve and control the flow of oil at any time,” said Robert Ebel, chairman of the energy and national security program at the Center for Strategic and International Studies in Washington. “They realize it’s not in their interest to see prices climb to an unacceptable level.”

When prices were headed to a record $147.27 last year, Saudi officials increased production by 500,000 barrels a day in June and July to halt the rally. By December 2008, prices collapsed as low as $32.40.

‘Upper End’ Prices

“Prices are probably at the upper end of what they are comfortable with right now because they are concerned about the health of the global economy,” said David Kirsch, an Overland Park, Missouri-based analyst with PFC Energy, an energy strategist to companies and governments.

Finance ministers and central bank governors of the Group of 20 nations said Nov. 7 that while economic and financial conditions have improved, “the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern.” The U.S. unemployment rate jumped to 10.2 percent in October, the highest level since 1983, the Labor Department said last week.

Crude and fuel stockpiles held in non-government tanks in the 30 developed countries in the Organization of Economic Cooperation and Development rose to 2.76 billion barrels in the third quarter, close to the record 2.77 billion reached in 1998, U.S. Energy Department figures show.

Storage Bulging

The 1998 glut caused oil to collapse to $10 a barrel. Now with storage tanks bulging from Singapore to Oklahoma, traders are being forced to store oil and fuel on ships that are bigger than the Chrysler Building.

The amount of heating oil and jet fuel stored at sea increased 17 percent to 112 tankers with a combined capacity of 13.1 million deadweight tons, London-based Simpson, Spence & Young Ltd., the world’s second-largest shipbroker, said in a Nov. 6 report.

OPEC President Jose Maria Botelho de Vasconcelos said Oct. 25 that the group may raise exports in December if prices remain above $75. Ministers are scheduled to meet on Dec. 22 in Luanda, Angola, to review production quotas that the group left unchanged at three gatherings in 2009. OPEC last agreed to increase supply targets in September 2007.

“We’re getting noise from OPEC and it’s probably Saudi inspired,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “They would probably like oil between $65 and $75 because that would be high enough for them and their friends to be fairly compensated.”

OPEC Concern

OPEC will hold a special meeting if oil prices reach $100 a barrel, Kuwait’s Oil Minister Sheikh Ahmad al-Abdullah al-Sabah said in Kuwait City on Nov. 3.

Rising equity prices and the weakening dollar have been reasons for the oil’s rally this year and will probably limit OPEC’s ability to dictate prices, according to Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington.

“Things are still being driven by the dollar, which raises challenges for OPEC,” Sieminski said. “If oil makes a run toward the triple-digits, they would traditionally put more oil on the market, but right now refiners have plenty on hand.”

The dollar has dropped 6.8 percent in the past year against a basket of six major currencies as the Fed, led by Chairman Ben S. Bernanke, cut rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s.

“Prices are being held up by non-oil factors,” Kirsch said. “The easiest way for OPEC to lower prices would be for them to buy up dollars and Treasuries.”

Iran, Venezuela

The falling dollar has hurt the buying power of oil exporters, according to Iran and Venezuela.

“It went to $81 to $82 for a few days but you can’t believe that’s what you’re really getting,” Iran’s OPEC governor, Mohammad Ali Khatibi, said in a phone interview from Tehran on Nov. 3. “You have to consider not only the current price, but the year-to-date average.”

The benchmark crude price used by OPEC, derived from the cost of oil produced by each of its 12 members, averaged $41.50 barrel in January and was at $77.45 on Nov. 5.

“A floor of $80 and stability” are Venezuela’s goal for next year, the country’s oil and energy minister, Rafael Ramirez, told reporters in Caracas on Nov. 4.

Iran pumped an average 444,000 barrels a day above its OPEC target in October, making it the biggest quota-buster, according to data compiled by Bloomberg. Venezuela produced 234,000 barrels more than its target.

“They are always looking for higher prices,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “They let the Saudis do the work, while they pump as much as they can.”

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net.