MARKET WATCH: Crude price declines on expectations OPEC will raise quota

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 7 -- Crude oil prices fell June 6 for the second consecutive session, with the decline steepening to more than 1% and dropping below $100/bbl among general expectations that ministers of the Organization of Petroleum Exporting Countries will raise production quotas at their regular June 8 meeting in Vienna.

“The broader markets lost their footing and fell 1% yesterday as investors remained concerned about the country's economic outlook,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas managed to keep its head up and tore through a series of resistance levels to end the day up 2.4% on hotter weather forecasts. The SIG Oil Exploration & Production Index and Oil Service Index both fell 3% on oil and broader market weakness.” Energy prices were down further in early trading June 7.

“OPEC is the focus this week as its member countries assemble…for their first official meeting since early December,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “During the last 6 months, market dynamics have changed substantially, firstly on the heels of the Libya conflict that has taken out of the market most of Libya’s crude output, and secondly the Japanese earthquake that forced a number of refineries to shut down and caused Japan’s domestic oil demand to drop.”

Zhang said, “In a broader context, the global economy showed strong momentum in the first quarter. However, recent macroeconomic data signal a slowdown in the US and some cooling of the Chinese economy on further monetary tightening there in order to tame inflation.”

OPEC’s current production quotas have been in place since September 2008 when global oil demand and prices collapsed during the most severe recession since World War II. Oil demand and prices recovered on the back of global growth in 2010, however.

This year, said Zhang, “The collective compliance level of OPEC member countries was fairly stable, around 55% (calculated as total overproduction above the quotas divided by the total 4.2 million b/d production cut agreed in September 2008).”

In February as the civil war in Libya escalated, OPEC members with the largest spare capacity—Saudi Arabia, the UAE, and Kuwait—increased production to partly offset the Libyan shortfall. “The latest data reveal that the May production from Saudi Arabia, Kuwait, and the UAE increased by 525,000 b/d, 195,000 b/d, and 110,000 b/d respectively from those in January, while Libya’s crude output fell by 1.4 million b/d in May, compared to January” Zhang reported. However, he said, “Despite the increase from OPEC members other than Libya, total OPEC production fell by 500,000 b/d in May.”

He expects OPEC to raise production quotas by 1-2 million b/d, “effectively rectifying most of the current overproduction.” However, he said, “This should have limited impact on the physical oil market.”

Meanwhile, term structures of West Texas Intermediate and North Sea Brent weakened slightly on June 6. “Oil products largely followed crude after recent gains in cracks,” Zhang said. “Distillates are showing counter-seasonal strength, while gasoline is lagging despite the US driving season. Consequently, we expect refineries to shift production yields more towards distillates in the coming weeks.”

In other news, violent confrontations between government loyalists and demonstrators escalated in Syria and Yemen. As many as 120 police and security forces were reported killed in Syria, while Yemen’s president has left the country for medical treatment.

Zhang sees “increasing risks of further a downward correction in oil prices.” He said, “Any changes to OPEC quotas would be largely symbolic, as member countries have been overproducing. However, the stance of the organization’s willingness to increase the quotas is likely to weigh on bullish sentiment.”

Saudi Arabia’s production level will have more relevance than any formal agreement at tomorrow’s OPEC meeting, said Olivier Jakob at Petromatrix, Zug, Switzerland. He noted reports by Reuters news service that Saudi oil production is expected to reach 9.6 million b/d this month.

“That level of Saudi production would bring OPEC production levels to about 29.7 million b/d, and that would compare with a call-on-OPEC by the International Energy Agency of 29.7 million b/d,” Jakob reported. “Hence on a global basis, the Saudi production increase would prevent global stock draws in 2011.”

Meanwhile, the Standard & Poor’s 500 index “continues to correct lower and has broken the lows set in mid-April. The next big support line moves down to 1,257.64, which is the start-of-the-year level,” said Jakob.

WTI tried unsuccessfully to regain its 100-day moving average price during the June 6 session. “For the last 20 trading days, WTI has been well supported on the lows but not well bid (i.e. no follow-though buying). Large speculators are still extremely long [on] WTI, and we are back to price levels where returns on WTI length are flat for the year after the roll costs,” Jakob said.

Energy prices
The July contract for benchmark US sweet, light crudes fell $1.21 to $99.01/bbl June 6 on the New York Mercantile Exchange. The August contract dropped $1.20 to $99.60/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.21 to $99.01/bbl, in step with the price of the front-month futures contract.

Heating oil for July delivery declined 3.93¢ to $3.02/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 4.32¢ to $2.95/gal.

However, both the July natural gas contract on NYMEX and the spot market price of gas at Henry Hub, La., gained 12¢ each, to $4.83/MMbtu and $4.84/MMbtu, respectively.

In London, the July IPE contract for Brent crude lost $1.36 to $114.48/bbl. Gas oil for June dipped by 75¢ to $950/tonne.

The average price for OPEC’s basket of 12 reference crudes retreated 33¢ to $110.11/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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