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Oil Falls to Five-Week Low as Al-Naimi Signals Increased Supply

Oil fell to the lowest level in five weeks as Saudi Arabian Oil Minister Ali al-Naimi signaled OPEC may bolster production to meet increasing fuel demand.

Oil dropped 1.4 percent after al-Naimi said he was “optimistic” about energy markets and that oil prices would be stable. Saudi Arabia will have spare production capacity of about 4 million barrels a day to maintain the global “supply-demand balance,” he said.

“Naimi’s comments should be very bearish for the market,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It suggests that the Saudis aren’t interested in seeing higher prices and may put a lid on them.”

Crude oil for March delivery dropped $1.24 to $87.87 a barrel on the New York Mercantile Exchange, the lowest settlement price since Dec. 16. Futures are up 18 percent from a year ago.

Brent crude oil for March settlement fell 99 cents, or 1 percent, to $96.61 a barrel on the London-based ICE Futures Europe exchange. Brent traded at a premium of $8.74 to the Nymex contract, the highest level since February 2009.

Worldwide oil demand may increase in 2011 by 1.8 million barrels a day, or 2 percent, al-Naimi said in Riyadh today. He said that the Organization of Petroleum Exporting Countries’ policy is to meet any additional requirement for crude.

Increasing Capacity

“Some OPEC countries will increase their production capacities, thus maintaining OPEC’s spare capacity at approximately 6 million barrels per day,” al-Naimi said.

The International Energy Agency last week raised its 2011 global crude oil demand forecast for a fourth month as the economic recovery gathers momentum.

Worldwide oil consumption will grow by 1.4 million barrels, or 1.6 percent, to 89.1 million a day, the IEA, an energy consultant to industrialized nations, said in its monthly report. Demand surged 3.2 percent to 87.72 million barrels a day in 2010. In January 2010, the IEA projected that demand would rise to 86.3 million barrels a day last year.

“It’s pretty clear that the fundamentals are improving,” Adam Sieminski, the Washington-based chief energy economist at Deutsche Bank AG, said in a phone interview from Dubai. “The recovery of demand has surpassed what people projected a year ago. It’s clear that demand will continue to grow at a steady pace this year.”

Listening to al-Naimi

Al-Naimi’s comments signal that Saudi Arabia sees little concern in raising supplies in response to increasing demand and that there is short-term risk oil prices may decline, JPMorgan Chase & Co. analysts led by Lawrence Eagles in New York said in a note to clients.

OPEC’s oil production climbed to a four-month high of 29.2 million barrels a day in December, according to a Bloomberg News survey of oil companies, producers and analysts. Compliance with quotas designed to curb output by all the members except Iraq, was at 53 percent last month, down from 56 percent in November.

The group could earn $847 billion in net oil export revenue in 2011, up 13 percent for an estimated $750 billion in 2010, the U.S. Energy Department forecast last month. Saudi Arabia received the largest share of the group’s 2010 earnings, at an estimated $153 billion, or 27 percent, according to the government report.

Merrill $100 Forecast

Merrill Lynch Wealth Management said crude will probably surpass $100 a barrel and Goldman Sachs Group Inc. said commodities may be heading toward a “structural bull market.”

Crude oil will rise because of the “strong demand picture coming through,” Bill O’Neill, London-based chief investment officer for Europe, the Middle East and Africa at Merrill Lynch Wealth Management, told reporters in Helsinki today.

“It will be moving through $100, staying above $100 for a time, but there is no return to $147” a barrel, O’Neill said.

Global stockpiles fell less than usual in November and December, leaving a surplus of supplies in the fourth quarter, the Goldman Sachs report showed today. That may indicate OPEC is tapping into its idle production capacity earlier than anticipated, it said.

Increased supply “ultimately accelerates the draw on OPEC spare capacity,” analysts led by Jeff Currie in London said in the report. “The market may already have moved into the second stage of its cyclical recovery on the road to a structural bull market in oil.”

Oil volume in electronic trading on the Nymex was 775,461 contracts as of 3:23 p.m. in New York. Volume totaled 649,585 contracts Jan. 21, less than 0.1 percent above the average of the past three months. Open interest was 1.5 million contracts.

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