OPEC Cheating Most Since 2004 as $100 Oil Heralds More Supply

OPEC is breaching its production limits the most in six years, signaling the world’s biggest suppliers are ready to pump more crude next year as oil rallies toward $100 a barrel.

The Organization of Petroleum Exporting Countries excluding Iraq pumped 26.78 million barrels a day this year, exceeding the quotas by an average of 1.934 million a day, the highest level since 2004, according to data compiled by Bloomberg. Crude rose 12 percent in 2010 as demand recovered, trading at about $90 for the first time in two years. Options to buy at $100 next December are near a five-month high.

Flouting quotas lets OPEC, which provides about 40 percent of the world’s oil, boost profits without changing targets set when the first global recession since World War II caused prices to tumble 78 percent. Analysts say the rally may lead the 12- member group to raise output next year after leaving quotas unchanged at this weekend’s meeting in Quito, Ecuador.

“Definitely $100, that would be a trigger,” said Leo Drollas, the London-based director and chief economist at the Centre for Global Energy Studies, a market researcher founded by former Saudi Oil Minister Sheikh Ahmad Zaki Yamani. “Bells are ringing in the corridors already. If this carries on, if it’s a really cold winter, we can see prices heading up to $100. At some stage even the Saudis will realize there’s something going on here, and that they should respond. And they will.”

Raising Forecasts

OPEC has maintained a production target of 24.845 million barrels a day since December 2008, the longest period that quotas have stayed unchanged since they were first used in 1982. The 11 members with quotas pumped 26.7 million barrels a day last month, 1.9 million more than targeted, Bloomberg data show.

Wall Street is raising its price forecasts for next year after crude on the New York Mercantile Exchange reached $90.76 a barrel on Dec. 7, the highest level since Oct. 8, 2008. Futures for January delivery traded at $89.11 a barrel as of 7:16 a.m. local time. Oil is up 30 percent from this year’s low on May 20, though down 40 percent from the record $147.27 on July 11, 2008.

“We are more inclined to believe that Saudi Arabia will act responsibly and encourage OPEC members to increase output early next year” to avoid a surge in oil prices, Francisco Blanch, head of commodity research at Bank of America-Merrill Lynch in New York, said in an e-mail after the Quito meeting.

Goldman Sachs Group Inc. said Dec. 1 that crude will average $100 in 2010 and $110 in 2012. In June last year, Goldman had predicted oil would rally to $85 by the end of 2009, though that level wasn’t attained until this April. JPMorgan Chase & Co. said Dec. 3 oil will average $93 in 2011, increasing its estimate from $89.75, and reach $120 before the end of 2012.

Higher Revenue

“OPEC will sequentially need higher revenues to pay for increasing social, investment and energy costs,” analysts at JPMorgan led by New York-based Lawrence Eagles wrote Dec. 3. “If the world economy can bear it, they will allow the acceptable price range to step up both in 2011 and 2012.”

Options that give investors the right to buy December 2011 futures at $100 rose to $7.10 on Dec. 7, the highest price since August, according to Nymex data. They averaged $6.39 this year. There are 44,981 outstanding contracts, the largest open interest for any oil-options contract in New York.

Higher prices are a tax on consumers that may stunt growth, Blanch wrote in an Oct. 17 report. Every $10-a-barrel increase adds $42 billion to the cost of U.S. imports, $49 billion in Europe, $19 billion for China and $16 billion to Japan, he said.

“Within about two weeks of oil being at $100, I think you would get more consumer-nation pressure on OPEC” to increase production, said Ann-Louise Hittle, a senior analyst at Wood Mackenzie in Boston. “Their number one concern is not to damage heavily the economic recovery that is under way.”

Consumer Confidence

Confidence among U.S. consumers increased more than forecast in December to the highest level in six months at the same time Americans began stepping up holiday spending. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 74.2 from 71.6 in late November.

Stockpiles in Organization for Economic Cooperation and Development nations unexpectedly fell in the third quarter, dropping 11.5 million barrels, according to the International Energy Agency, compared with the five-year average gain of 38.6 million for that period. Growth in demand last quarter was “giddy,” with North America “remarkably strong,” the Paris- based agency said in a Dec. 10 report.

“Against a backdrop of much stronger-than-expected global oil demand growth and oil prices above two-year highs, OPEC may come under pressure to increase supplies to the market in the new year,” the IEA said in its monthly Oil Market Report.

Forward Curve

The narrowing difference between prices for futures of different maturities has pushed part of the market into so- called backwardation, where crude for soonest delivery is more expensive than for later months. That’s another sign dropping stockpiles will drive oil higher, according to Adam Sieminski, chief energy economist at Deutsche Bank AG.

Falling inventories make rallies “more sustainable,” Washington-based Sieminski wrote Dec. 3, raising his 2011 average forecast to $87.50 a barrel, from $80.

Crude for December 2011 delivery traded at $91.01 a barrel on the Nymex, 97 cents higher than December 2012 futures. It was 87 cents less than the 2012 contract on Nov. 30.

OPEC’s gathering in Quito two days ago was the seventh meeting with no change in production quotas. The group meets next in June. Asked what price level is appropriate, Saudi Arabian Oil Minister Ali al-Naimi told reporters: “How many times do I have to tell you. $70 to $80 is a good price.”

‘Fundamentals Wrong’

An increase to $100 may indicate “something wrong with fundamentals” in the market and lead OPEC to act, Abdalla El- Badri, the organization’s secretary-general, said on Dec. 9.

Venezuelan Energy Minister Rafael Ramirez told reporters after the Dec. 11 meeting ended that $100 is “fair” and he expects oil to reach that level next year.

Higher prices rather than increased production may help Iran, which can’t lift output as fast as other nations, and Venezuela, whose heavy crude deposits make drilling more expensive, according to Wood Mackenzie’s Hittle.

Iraq will account for 54 percent of the increase in OPEC’s supply capacity in the six years ending 2015, according to the IEA, replacing Iran as the biggest producer after Saudi Arabia.

Saudi Aramco, the world’s largest state-owned oil company, will start pumping 500,000 barrels a day from its Manifa field in 2013, Chief Executive Officer Khalid Al-Falih said in Dubai on Dec. 8. The kingdom has the capacity to pump 12.08 million barrels a day, of which it is now using 8.3 million barrels a day, IEA data show.

Above $100

“I don’t think you’ll see Saudi Arabia starting to eat out of the spare capacity until inventories go below the five-year average or oil prices go above $100 a barrel,” said Torbjoern Kjus, senior oil-market analyst at DnB NOR in Oslo.

OPEC’s members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Iraq is exempt from the quota system.

The group agreed on a record 4.2 million barrel-a-day supply cut at the end of 2008 in response to the recession. Adherence to that pledge peaked at 89 percent in March 2009 and was 56 percent last month, according to Bloomberg estimates.

“They could raise the quotas by a million and a half barrels a day and in theory it wouldn’t matter,” said Sieminski. “It wouldn’t change anything. They’d still be producing more than their targets.”

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Margot Habiby in Quito at mhabiby@bloomberg.net

To contact the editors responsible for this story: Stephen Voss on sev@bloomberg.net; Dan Stets at dstets@bloomberg.net

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