Saudi Arabia to Check Oil Rally in 2011, Merrill’s Blanch Says

Saudi Arabia, the world’s largest crude exporter, will lead OPEC to increase production next year, avoiding a surge in oil prices that could put global economic recovery at risk, Bank of America Merrill Lynch said.

Oil prices are experiencing steady rising pressures and that puts the Organization of Petroleum Exporting Countries in a position to choose between allowing further increases or “show its might by keeping prices steady,” said Francisco Blanch, head of global commodities research at Merrill Lynch. New York- traded crude only stayed above $100 a barrel for about six months in 2008 “before the world economy collapsed into the worst crisis since the 1930s,” he said.

“We are more inclined to believe that Saudi Arabia will act responsibly and encourage OPEC members to increase output early next year,” Blanch said in an e-mail.

OPEC, supplier of about 40 percent of the world’s oil, agreed on Saturday not to alter production quotas, which remain unchanged since late 2008. Supply and demand are “in balance,” and $70 to $80 is “a good price”, Saudi Arabian Oil Minister Ali al-Naimi said at the group’s meeting in Quito, Ecuador.

Crude inventories are drawing back to their 5-year averages very rapidly and global demand continues to grow at a fast pace, “encouraged by negative real interest rates,” Blanch said. “Allowing oil prices to continue to rise unchecked from the current levels is a dangerous game,” he said.

Oil prices jumped to the highest level since October 2008 last week on cold-weather forecasts for the U.S. and Europe, and speculation the U.S. may extend stimulus measures, causing the dollar to weaken. A declining dollar boosts the appeal of commodities as an alternative investment.

Crude will rise to $100 per barrel next year, Venezuelan Energy and Oil minister Rafael Ramirez said on Saturday, adding that this level would be “fair” for both producers and consumers, making up for the “the dollar’s weakness.”

To contact the reporters on this story: Juan Pablo Spinetto in Quito at jspinetto@bloomberg.net

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

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