London: Ever since oil began its 69% plunge from a record $147.27 (Rs7,629 today) a barrel in July, traders have been looking for a bottom. Now that the Organization of the Petroleum Exporting Countries (Opec) reduced supplies 13% since September, inventories are falling 1.4 million barrels a day, according to PVM Oil Associates Ltd, the world’s biggest broker of energy trades between banks.
Opec will limit exports again when the group meets on 15 March, according to a survey by Bloomberg.
Closing the tap: The US energy department says that Opec states have more incentive to cut output as the combination of falling oil prices and global recession will reduce earnings 59% this year to $402 billion. Dadang Tri / Reuters
The Opec states have more of an incentive than ever to restrict output, because the combination of declining prices and the global recession will reduce earnings 59% this year to $402 billion, according to the US energy department. Crude demand will drop for a second year, the first back-to-back decline since 1983, according to the International Energy Agency.
“Opec’s cutbacks are enough to address the surplus,” said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If they do more and try to pursue a price target too aggressively, there’s a risk of over-tightening the market when the economy is weakening, stalling the recovery.”
Expectations for a rally increased as oil rose for a second day, gaining as much 2.7% to $46.76 a barrel on the New York Mercantile Exchange. The April contract rose 1.7% last week, after jumping 12% the previous week. Futures will rebound to average $49.56 a barrel in the second quarter, according to the mean of 25 analyst forecasts compiled by Bloomberg since December.
“Oil may reach $60 a barrel should Opec cut production,” said Pierre Andurand, chief investment officer at BlueGold Capital Management Llp., the London hedge fund that returned 31% this year. Boone Pickens, the billionaire hedge fund manager, had said he expects $75 in 2009, in a CNBC interview last week.
In the Bloomberg survey, 31 of 41 analysts said Opec will limit output for the fourth time next week. Of those, 13 expect a reduction of 500,000-1 million barrels a day, 12 say one million barrels and two estimated 1.5 million. The rest declined to provide an estimate. Ten of the 41 analysts anticipated no change in the quota.
The drop in global inventories is shrinking profit earned from storing crude, paid from a so-called contango, where prices for delivery in the future are higher than costs for immediate consumption.
The potential $17.93-a-barrel profit available in December to speculators, who bought and stored oil for a year, has plunged 57% for London’s Brent oil.
Dubai crude, a benchmark for Opec oil exports to Asia, now costs more for immediate delivery than in the months ahead. The so-called backwardation is a sign of tightening crude supplies.
Oil prices surged fivefold in five years before peaking at $147.27 in July. In the same period, Opec output rose 23% to a record 32.775 million barrels a day. As the subprime crisis spread, prices collapsed 78% to a low of $32.40 in December. Opec responded with three production cuts. Crude prices have climbed 40% from December’s low.
Higher prices would also ease budget strains from Russia to the United Arab Emirates. “Forty dollars a barrel has some difficulty, even for Saudi Arabia and Kuwait,” said David Kirsch, an analyst with Washington-based PFC Energy, a consulting company. “Some countries can survive at that level, but all of them are uncomfortable.”
Margot Habiby in Dallas, Alex Kwiatkowksi and Chanyaporn Chanjaroen in London, Paul Tobin in Madrid and Christian Schmollinger in Singapore contributed to this story.