Oil Drops to Eight-Week Low Ahead of Forecast U.S. Inventory Gain, OPEC

Crude oil fell to its lowest in almost eight weeks amid speculation OPEC may boost output and before a U.S. report that may show supplies in the world’s biggest crude user rose last week.

An Energy Department report tomorrow will probably show U.S. crude inventories climbed 1.25 million barrels last week, according to a Bloomberg News survey. Futures dropped 1.4 percent yesterday after Saudi Arabian Oil Minister Ali al-Naimi said some members of the Organization of Petroleum Exporting Countries may increase production capacity to maintain the global “supply-demand balance.”

“It’s very good news that OPEC has finally reacted to the rise in oil prices; I think it’s going to keep prices a bit more contained,” Francisco Blanch, Head of Global Commodities Research at Bank of America Merrill Lynch, said in an interview on Bloomberg television’s “On the Move” with Francine Lacqua. “We are, however, structurally positive on the oil market. We believe demand is going to remain quite robust.”

Oil for March delivery declined as much as $1.57, or 1.8 percent, to $86.30 a barrel in electronic trading on the New York Mercantile Exchange, its lowest price since Dec. 2, and was at $86.72 at 1:24 p.m. London time. Brent crude for March settlement slid $1.27 to $95.34 a barrel on the London-based ICE Futures Europe exchange. Yesterday, it fell 99 cents, or 1 percent, to $96.61.

An Energy Department report tomorrow will probably show that U.S. crude inventories increased 1.25 million barrels last week from 335.7 million, according to the median of 12 analyst estimates in a Bloomberg News survey.

‘Increasing Discomfort’

U.S. crude stockpiles rose 2.62 million barrels in the week ended Jan. 14, the first increase in seven weeks, the department said last week. The industry-funded American Petroleum Institute publishes its report today.

Al-Naimi’s comments “indicate that the Saudis find increasing discomfort as oil approaches triple digits,” said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. “It’s not due to supply tightness that we have $90 to $100 oil. We do have a well-supplied market today, a lot of inventories, a lot of spare OPEC production capacity.”

Worldwide oil demand may increase in 2011 by 1.8 million barrels a day, or 2 percent, the Saudi oil minister said yesterday in Riyadh. OPEC’s policy is to meet any additional requirement for crude, he said.

“OPEC’s policy, as is well known, is to meet any increase in oil demand to maintain the supply-demand balance,” al-Naimi said. “Some OPEC countries will increase their production capacities, thus maintaining OPEC’s spare capacity at approximately 6 million barrels per day.”

Call on OPEC

OPEC, which accounts for about 40 percent of global supply, will need to increase exports by 300,000 barrels a day to 29.9 million a day this year to meet global demand, the International Energy Agency said last week in its monthly report.

This “call on OPEC,” or the difference between global demand and production in countries outside the 12-member group, is 400,000 barrels a day higher than last month’s estimate.

OPEC’s output needs to rise by 300,000 barrels a day to check a further rise in oil prices, Merrill Lynch said in a report today. There is a “substantial chance” crude futures will advance to $115 a barrel in the next 12 months, a level that if sustained could harm economic growth, the bank said.

Crude futures in New York rose 15 percent last year, the second consecutive increase, as the global economy recovered and growth in Asian economies like China accelerated.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Ann Koh in Singapore at akoh15@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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