Oil Drops as OPEC Considers Quotas on Slowing Economic Growth

Oil Drops as OPEC Considers Quotas
The entrance to the Organization of Petroleum Exporting Countries (OPEC) headquarters is seen in Vienna, Austria. Photographer: Dieter Nagl/Bloomberg

Oil fell in New York on speculation OPEC will increase production quotas amid evidence gains in prices may be damping economic recovery.

Futures dropped as much as 1.1 percent after United Arab Emirates Oil Minister Mohamed al-Hamli said the Organization of Petroleum Exporting Countries will supply more oil if there is a need as delegates arrived at today’s meeting of ministers in Vienna. Federal Reserve Chairman Ben S. Bernanke said the U.S. recovery was “frustratingly slow” yesterday in Atlanta, with households facing rising energy and food prices, declining house values and high unemployment.

“We take a bearish stand for the day” given the likelihood that OPEC will raise its output targets, Filip Petersson, Stockholm-based commodity strategist at SEB AB, said in a report. A 1.5-million-barrel increase in quotas “looks like the most likely outcome, which could hurt crude oil market sentiment today.”

Crude for July delivery dropped as much as $1.07 to $98.02 a barrel in electronic trading on the New York Mercantile Exchange and was at $98.46 at 1:40 p.m. London time. Prices are 36 percent higher in the past year.

Brent crude for July delivery fell 54 cents, or 0.5 percent, to $116.24 a barrel on the London-based ICE Futures Europe exchange. The contract yesterday gained $2.30, or 2 percent, to $116.78. Prices are up 61 percent the past year.

OPEC Quotas

“There is still much uncertainty about the strength of the world economic recovery,” Mohammad Aliabadi, the acting Iranian oil minister and current OPEC president, said in a speech in Vienna before the group announces its decision. OPEC is worried about “the persistently high level of unemployment and the sovereign debt crisis” in nations belonging to the Organization for Economic Cooperation and Development, he said.

OPEC will raise its production quota for the first time in almost four years to help replace lost Libyan supplies and meet growth in demand later this year, a Gulf delegate said yesterday. The group is producing 2 million barrels a day above its official ceiling, the delegate said, declining to be named because he isn’t authorized to speak publicly.

The group last collectively agreed a production increase on Sept. 11, 2007, setting a quota of 27.253 million barrels a day.

“Psychologically, any quota move will be bearish for the market in the short term,” said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. “There is a sense that the U.S. gasoline market isn’t going to save us.”

Gasoline Demand

U.S. gasoline demand at the pump slid 2.9 percent last week as Americans returned to work after the Memorial Day holiday weekend, according to a MasterCard Inc. SpendingPulse report.

Production quotas will likely increase by 1.5 million barrels a day, analysts from Societe Generale SA and Morgan Stanley said in reports yesterday. That would be about a quarter of the group’s spare capacity, based on Bloomberg estimates.

OPEC had 5.94 million barrels a day in spare capacity in May, down 2.7 percent from April, based on Bloomberg estimates. Spare capacity was 6.31 million barrels a day in March, the highest level since May 2009.

U.S. motorists bought an average 9.19 million barrels a day of gasoline in the week ended June 3, down from 9.46 million the previous week, according to the MasterCard report. Averaged over four weeks, gasoline use was 1.3 percent below the same period in 2010, the 11th consecutive decline.

An Energy Department report today may show crude inventories slipped by 1.38 million barrels while gasoline stockpiles increased by 1.05 million, according to a Bloomberg News survey of analysts.

The European benchmark crude contract traded at a premium of $17.72 a barrel to U.S. futures on the ICE exchange. The difference between front-month contracts in London and New York earlier reached a record $18.25.

“Unrest in the Middle East, North Africa region” is causing the gap to widen, according to analysts at Vienna-based researcher JBC Energy GmbH led by David Wech.

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