–OPEC Expected To Maintain Quotas But May Have To Raise Levels In 2011

By Brai Odion-Esene

WASHINGTON (MNI) – As delegations from OPEC’s member nations arrive
in Vienna ahead of the cartel’s October 14 meeting, the general
expectation is for no change in its production quotas, but the matter of
the weaker U.S. dollar, and the upside risk it poses to the price of
oil, will definitely be on the agenda.

Platts Margaret McQuaile, in Vienna for the meeting, told Market
News International a push from any OPEC member for a change in
production levels is unlikely.

“I don’t think there is any dissenting voice at all,” she said,
adding, “nobody seems to be calling for change or expecting any.”

OPEC nations, McQuaile continued, do not want to “rock the boat”
and do anything that might jeopardize what so far has been a fragile
global economic recovery.

One issue that will definitely be discussed at this week’s meeting,
McQuaile said, is the impact of the weaker U.S. dollar on oil prices.

WTI crude hit a five-month high of $84.43 last Thursday, and the
London-based Centre for Global Energy Studies Tuesday argued that
despite some good macroeconomic news, this rise above the $80 per barrel
mark is difficult to explain.

The think-tank, which has former OPEC officials among its staff,
noted in a weekly oil report that, “There are forces at work from a
fundamentals point of view that perhaps explain the recent rise in WTI
and Brent futures above $80/bbl.”

At this time of the year, it said, middle distillate demand —
measured as deliveries ex refinery — in the Northern Hemisphere tends
to rise as wholesalers endeavor to increase their stocks ahead of the
winter months. But crude and oil product stocks are still in plentiful
supply globally, the report added, meaning other, additional,
explanations need to be found for the recent price run-up.

It pointed to significant weakening by the dollar over the past few
weeks as rumors that the Federal Reserve would engage in further
quantitative easing turned into expectations. OPEC agrees, saying in its
report, “continued increases in U.S. money supply could further weaken
the dollar.”

“This fall in the value of the greenback, more than anything else
in our view, is why the price of oil (denominated in Dollars) rose
lately,” the CGES said.

It added, “Additional money expected to flow from the Fed via their
bond purchase programme has to be invested somewhere and, with interest
rates so low, much of this incremental carry trade is expected to find
its way into commodity markets: indeed, it is this expectation that has
helped to lift oil prices.”

So any improvement in the outlook for the U.S. economy would lead
to a drop in oil price, according to the CGES report, because if the
weakening of the dollar is related to worries about the stuttering
economy — which would necessitate more QE — “any sign that growth in
the U.S. is picking up would strengthen the dollar and bring oil back
below $80/bbl.”

The idea of OPEC remaining on hold, while it continues to monitor
the recovery’s progress, was reinforced in its Monthly Oil Market Report
published Tuesday.

The report noted the world economy “continues to expand at
below-average levels,” and that a broad consensus in the market is crude
oil prices around the current range — $70 to $85 per barrel — have
been accommodative in promoting adequate investment while at the same
time supporting the economic recovery.

Although prices have remained within a fairly stable range, OPEC
said, there is still a need for continued caution, especially in light
of the uncertainties influencing the market. “As always, OPEC stands
ready to take the necessary decisions to support oil market stability,”
the report concluded.

So, “I don’t think it will be a very eventful meeting,” McQuaile
said, noting the cartel, still in “50th anniversary celebration mode,”
will leave things as they are.

OPEC, in its October report, revised upward by 100,000 barrels a
day its forecast for 2010 world oil demand growth, which is now expected
at 1.1 million barrels a day. The revision was driven by the
stronger-than-expected, stimulus-led economic growth in the first half
of the year.

In 2011, OPEC predicts global oil demand will grow by 1.0 million
barrels a day, unchanged from last month’s forecast, with demand growth
anticipated to be stronger in the second half of the year.

This uptick in demand is not matched by the outlook for supply.
OPEC forecasts non-OPEC oil supply to increase by 1.0 million barrels
per day in 2010, following an upward revision of 0.1 million barrels
from the previous month. In 2011, non-OPEC oil supply is expected to
grow 360,000 barrels per day.

This means OPEC might have to act next year to prevent a shortfall
in supply, with analysts at the National Bank of Kuwait warning Tuesday
that non-OPEC crude supply data “suggest that the organization may have
to lift its crude production considerably next year to prevent further
market tightening.”

The NBK analysts argue that OPEC’s quotas seem “somewhat obsolete”
after persistent breaches.

The upward creep of OPEC output, they said, “probably reflects the
cartel’s willingness to maintain prices at desired levels in light of
improved demand conditions and improved sentiment towards commodities
generally.”

OPEC estimates its total crude oil production averaged 29.08
million barrels per day in September, down around 30,000 barrels from
the previous month. If production by Iraq is excluded, OPEC crude oil
production averaged 26.67 million barrels per day in September, a
decline of 0.14 million barrels from the previous month.

The CGES report, somewhat cynically, said of OPEC members’ newfound
committment to compliance, “Although it is probably a stretch to claim
that these latest figures are purely the result of the upcoming OPEC
meeting this week — for instance, Angola’s lower number is reportedly
due to maintenance work and some technical problems — it is quite
plausible to assume that some members would be pleased to arrive in
Vienna with an improved compliance record.”

** Market News International Washington Bureau: 202-371-2121 **

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