JPMorgan Says OPEC Acts to Slow Oil, May Raise Later

OPEC will have to raise oil prices in coming years to maximize revenue even as it acts to quell crude’s rally toward $100 a barrel in the short term, according to JPMorgan Chase & Co.

Indications that members of the Organization of Petroleum Exporting Countries are raising output unilaterally are the first signs of a response to rising prices, said analysts at the second-largest U.S. bank by assets. Crude fell to a five-week low Jan. 24 after Ali al-Naimi, the oil minister of OPEC’s biggest member, Saudi Arabia, said the 12-member group will boost supply this year.

“The producer group does not want oil prices to rise too high, too quickly,” JPMorgan analysts, led by New York-based Lawrence Eagles, said in a monthly report dated yesterday. “But we believe the group has little option but to incrementally raise prices over the coming years to maximize the revenue from each barrel of oil produced.”

Brent crude has increased 3.4 percent this year on the London-based ICE Futures Europe exchange amid speculation strengthening global economic data signals a recovery in fuel demand. Futures reached $99.20 a barrel on Jan. 14, the highest since October 2008. Prices, trading near $98 today, are up 0.4 percent this week.

Tightness Subsides

OPEC, which pumps 40 percent of the world’s oil, is moving to cool oil prices just as “physical tightness looks set to subside from mid-February,” according to JPMorgan. Refiners on the U.S. Gulf and West Coast have started shutting plants for seasonal maintenance and will be joined by operators in Europe in the coming weeks, it said.

While the group acts to cap oil’s rise now, it will have to increase prices in years ahead if it wants to protect its revenue, according to the bank. End-user prices will rise regardless of OPEC’s actions, as governments in consuming countries raise taxes for a greater share of revenue, it said.

“A large tax take is a long-standing thorn in OPEC’s side,” the analysts said.

Gasoline prices in the U.K. are about $320 a barrel and diesel near $330, leaving OPEC with “less than a third” of sales revenue, according to JPMorgan. China, the world’s largest energy user, has also imposed some oil taxes and introduced policy to reduce energy intensity, it said.

OPEC, next scheduled to review production policy at a meeting in June, agreed at its last gathering Dec. 11 to maintain formal output targets at levels set two years earlier. Current prices are in a “comfortable zone,” said the group’s Secretary-General Abdulla El-Badri.

Demand Forecast

JPMorgan increased its forecast for global oil demand growth next year by 300,000 barrels a day to 1.7 million barrels. It estimates consumption will average 89.4 million barrels a day in 2011, higher than the 89.1 million predicted by the International Energy Agency. It also forecasts oil prices will increase $15, or about 19 percent, to $95 a barrel.

Goldman Sachs Group Inc. this week said oil’s rally from $75 a barrel since September has partially been driven by OPEC holding back supply. The group should boost supply to prevent prices threatening the global recovery, according to Bank of America Merrill Lynch.

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.

To contact the reporter on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net

To contact the editor responsible for this story: Clyde Russell at crussell7@bloomberg.net

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