Oil climbed towards $42 a barrel on Monday after OPEC said it was willing to cut oil output further if needed to stabilise oil prices.

The market was also supported by a giant U.S. economic stimulus package that the administration of U.S. President Barack Obama is expected to get through Congress this week.

U.S. crude for March delivery rose $1.67 cents to $41.84 a barrel by 1448 GMT. London Brent climbed $1.45 cents to $47.66.

“If we think we still need more action, I’m sure the conference will take more action to stabilise the market,” the secretary-general of the Organization of Petroleum Exporting Countries, Abdullah al-Badri, told reporters in London. He was referring to OPEC’s supply policy meeting on March 15 in Vienna.

Badri also said the 12-member group appeared to be implementing promises of production cuts more thoroughly than expected by some in the oil market with 80 percent compliance.

OPEC has said it will cut oil supply by 4.2 million barrels per day (bpd) from its level of production in September in an attempt to bolster oil prices that have fallen from a record high of almost $150 a barrel last July.

Harry Tchilinguirian, oil analyst at BNP Paribas in London, said the market was also looking ahead to the passage this week of a massive economic stimulus package to try to revive the U.S. economy.

STIMULUS

“The stimulus package is a supportive structural factor,” he said. “It should begin to have an impact on the economy in the second half of this year and is an underlying element conditioning sentiment.”

Top aides to President Obama on Sunday urged Democratic and Republican lawmakers to set aside political differences and quickly approve the stimulus package this week, as the world’s largest economy suffers from the worst financial crisis in 70 years.

Later on Monday, the Democratic-led Senate, with the help of a handful of Republicans, was due to vote to end debate on the $827 billion plan to clear the way for its passage on Tuesday.

Oil prices fell on Friday after news of steep job cuts in the United States, where nearly 600,000 jobs were slashed last month, the most severe cut since December 1974 prompting worries of still weaker demand in the world’s biggest oil consumer.

The financial malaise, which first sprang from home loan defaults in the United States, has swiftly spread to Europe and Asia, pushing a string of industrialised nations into recession.

Renewed violence in Nigeria also helped buoy oil prices. Nigerian militants attacked a gas plant operated by Royal Dutch Shell in the Niger Delta on Saturday and warned of more attacks to come, but the army said it had repelled the raid and killed three gunmen.

LONDON, Feb 9 (Reuters)

Oil held around $40 a barrel on Thursday after U.S. crude stocks swelled to an 18-month high and investors anticipated more bleak economic data out of the world’s biggest fuel consumer.

The outlook for more huge job losses in the United States darkened the demand prospects there.

A global financial slowdown has cut demand and swollen fuel stocks, knocking more than $100 a barrel off the price of crude since its July 2008 peak of $147.

U.S. crude inventories jumped by 7.2 million barrels to an 18-month high last week, data from the U.S. Energy Information Administration showed, twice what analysts expected and the sixth straight weekly rise.

U.S. light crude for March delivery ticked up 2 cents to $40.34 a barrel at 1019 GMT, about $4 below London Brent crude for the same month, which gained 30 cents to trade at $44.45 a barrel.

U.S. crude has been locked between $39 and $49 a barrel for the past two weeks.

“Crude oil markets still seem to be trapped within a trading range, as market anticipation about OPEC cuts — both current and pending — is keeping something of a floor below prices,” MF Global said in a report.

“…The upside is capped by lingering concerns over the macro situation.”

Oil losses have been limited by signals this week from the Organization of the Petroleum Exporting Countries that it may cut oil production further in an attempt to bolster the market.

OPEC, worried that the global economic downturn is reducing oil demand and pressuring prices, has promised to reduce oil production by a total of 4.2 million barrels per day (bpd) from levels seen in September.

LONDON, Feb 5 (Reuters)

Oil prices climbed towards $41 a barrel on Tuesday after OPEC signaled it might deepen its record output cuts to help boost prices and drain bloated stockpiles.

OPEC’s president told Reuters the group could take more action when it meets on March 15. Later, an OPEC source said the group may discuss a 1 million barrel-per-day cut in addition to the 4.2 million in reductions agreed since September.

U.S. light crude for March delivery rose 73 cents to $40.81 by 1730 GMT, having fallen to $39.83 on Monday, the first time below $40 a barrel in three weeks. London Brent rose 53 cents to $44.35.

“Prices do seem to have bottomed for now,” said Kevin Norrish of Barclays Capital. “OPEC has probably taken more than enough off the market and there’s a risk of over-tightening, in which case prices would go back up fairly swiftly.”

Slowing economic growth in the United States, China, Japan and other major consumers has dampened fuel use, swelled stocks and knocked more than $100 a barrel off the price of crude since its July 2008 peak near $150.

But despite the softening world energy demand, oil has held stubbornly above the $40 mark in recent weeks, buoyed partly by the aggressive OPEC cuts.

A Reuters survey showed the group, which pumps a third of the world’s oil, had carried out about 67 percent of its record curb in January.

Adding support to prices Tuesday were oil worker labor disputes in the United States, Europe and Nigeria — though none had hurt supplies yet.

Negotiators were hashing out a contract for U.S. refinery and pipeline workers and the union has said it could strike if talks break down — a move that would shut some 10 percent of the nation’s fuel production capacity within days.

In Europe, hundreds of contract workers at British energy facilities were protesting the use of foreign workers, though operations at refineries, power plants and pipelines remained unaffected.

Nigeria’s senior oil workers’ union, meanwhile, threatened to begin an indefinite strike from Monday unless the government improved security in the Niger Delta, its restive oil heartland.

Nigeria pumped about 1.75 million barrels per day (bpd) in January, versus its OPEC supply target of 1.67 million bpd, according to the Reuters survey.

U.S. crude inventory data were likely to show stocks rose for the sixth time in a row as refinery utilisation remained curbed by seasonal maintenance and imports rose, according to a Reuters poll of analysts.

Analysts issued their forecasts ahead of weekly inventory data to be released on Wednesday by the U.S. Energy Information Administration. Industry group American Petroleum Institute will release its data on Tuesday.

LONDON, Feb 3 (Reuters)

Oil fell below $40 a barrel on Tuesday, pressured by gloom about prospects for world economic growth which outweighed heightened tensions in the Middle East due to the Israeli-Hamas conflict.

Prices had jumped as much as 12 percent on Monday after Israel launched its fiercest air offensive in the Hamas-ruled Gaza strip in decades.

U.S. crude was down 77 cents at $39.25 a barrel by 1151 GMT, having earlier touched a session high of $40.39.

London Brent fell 60 cents to $39.95.

“With most global economies struggling and credit markets still in an impaired state, it is hard to get too excited about the upside potential in energy markets attributable solely to geopolitical factors unless, of course, these are directed at the heart of the oil supply system,” said Edward Meir of futures broker MF Global.

Oil is heading for a loss of nearly 60 percent this year, its biggest annual fall since futures began trading 25 years ago. It has dropped more than $100 from a record peak above $147 a barrel in July.

“People are still wary of the global economic problems. There is still pessimistic news coming out of the States,” said Gerard Rigby, an analyst at Fuel First Consulting in Sydney.

He said he would also be watching the dollar and stock markets moves.

The dollar slipped against the euro and a basket of currencies, depressed partly by the Israeli offensive, which has helped to dampen dollar sentiment.

The Organization of the Petroleum Exporting Countries has agreed its biggest-ever production cut of 2.2 million barrels per day (bpd) to fight the oil market slide.

The group has cut output three times in an effort to remove about 5 percent of world supply.

OPEC oil supply, excluding Iraq and Indonesia, is expected to fall by 400,000 barrels per day in December as members boost compliance with their deal to reduce output, consultant Petrologistics said.

The estimate indicates OPEC has more than delivered on its pledge to lower supply from 11 members to 27.3 million barrels per day from Nov.1 to prop up prices.

A poll of analysts forecast that U.S. crude stocks will have fallen by 1.4 million barrels last week, while distillate inventories will have risen by 1 million barrels and gasoline stocks increased by 1.5 million barrels.

Weekly U.S. fuel inventory data is due on Wednesday.

LONDON, Dec 30 (Reuters)

Oil topped $50 a barrel on Monday, boosted partly by expectations OPEC will agree on a deep supply cut this week to try to prop up prices.

A weaker dollar also lent support to oil, which has fallen about $100 from a record high of more than $147 in July, as the global financial crisis has hit demand for fuel.

Goldman Sachs has predicted oil could go as low as $30.

U.S. light crude for January delivery rose to as high as $50.50, topping the $50 line for the first time since early December. It was trading $3.00 up at $49.28 by 1421 GMT.

It has rebounded by more than 20 percent from a 4-year low of $40.50 a barrel on Dec. 5.

London Brent crude gained $2.89 to $49.30.

Members of the Organization of the Petroleum Exporting Countries are in agreement on the need to cut output when they meet on Wednesday in Algeria.

“Everybody is supporting a cut,” OPEC President Chakib Khelil told reporters in Oran. [ID:nLF25582]]

He said Saudi Arabia, the world’s biggest exporter, has cut its supply by 8 percent and this had affected the market.

Since early September, OPEC has said it would reduce supply by a total of 2 million bpd, but prices continued to slide until a rally late last week, spurred partly by Saudi Arabia’s supply cut.

MARKET EXPECTS BIG CUT

Analysts say another 2 million bpd cut is needed from OPEC because demand will remain weak into 2009.

“We think should OPEC go for anything less than 2 million barrels a day, participants would be inclined to use this as a selling opportunity,” said Edward Meir of MF Global in a research note.

“The cartel is simply too far behind the curve to consider anything less than that,” he said.

“With global oil demand expected to continue falling through much of 2009, the pressure is on the cartel as well as non-OPEC producers such as Russia to remove excess production from the market,” said Jonathan Kornafel, Asia director of Hudson Capital Energy in a note.

OPEC’s Khelil said Russia, the world’s biggest exporter outside OPEC, had offered the group its “concrete support.”

There is already plenty of evidence that the world economic downturn has dampened demand for oil.

In China, the world’s second biggest energy consumer, implied oil demand shrank by about 3.5 percent in November from the year before, the first decline in nearly three years, Reuters calculations showed.

Khelil estimated there was an oversupply of 400 million barrels currently in the oil market.

He said he expected global oil demand to drop by 200,000 barrels per day in the first quarter of 2009 and by another 1.2 million bpd in the second quarter.

Jane Merriman
LONDON, Dec 15 (Reuters)

Oil fell below $43 on Tuesday after the U.S. government predicted world oil consumption would shrink this year and next, marking the longest demand contraction in three decades.

U.S. crude was down 84 cents at $42.87 a barrel at 1636 GMT, off a session low of $42.44.

London Brent crude fell $1.09 to $42.33.

The U.S. Energy Information Administration said in a report it expected global oil demand to fall by 50,000 barrels per day (bpd) in 2008 and 450,000 bpd in 2009.

This would mark the first time since the 1970s that world consumption would decline in two consecutive years.

“The EIA forecast is overly optimistic. I expect a significant contraction in demand, given the current state of the global economy,” said Tom Knight a trader at Truman Arnold.

The outlook for global oil consumption is very much on the minds of ministers from the Organization of the Petroleum Exporting Countries, which meets on Dec. 17 in Algeria.

OPEC is expected to reduce overall production by a minimum of one million barrels per day (bpd).

“Oil is on a count-down to OPEC now and everyone is expecting them to come up with something big — probably a cut of 1-1.5 million bpd,” said Rob Laughlin, senior oil analyst at brokers MF Global in London.

“If OPEC doesn’t make a big cut, this market is in trouble.”

Joe Brock
LONDON, Dec 9 (Reuters)

Oil leapt 6 percent on Monday to more than $43 a barrel, as a rebound in global equity markets and further evidence of supply cuts by top exporter Saudi Arabia helped the market break a six-session losing streak.

Prices dropped 25 percent last week, their biggest weekly fall in nearly 18 years, depressed by the world economic outlook.

U.S. crude for January delivery was up $2.56 to $43.37 a barrel by 1003 GMT. It fell more than 6 percent on Friday to close at $40.81, its lowest since December 2004.

London Brent crude rose $2.56 to $42.30 a barrel.

“Prices are higher on account of a short-covering bounce from extremely oversold conditions,” Edward Meir, of futures broker MF Global, said.

“OPEC’s meeting is nine days away, meaning that we could see some strengthening leading into the meeting,” he said.

Oil has fallen more than $100 a barrel from a record peak above $147 in July, as the credit crisis has started to hurt the wider economy and shrink demand for fuel.

Members of the Organization of the Petroleum Exporting Countries have called for more supply cuts when the producer group meets on Dec. 17 in Algeria.

SAUDI CUTS BACK

OPEC has already agreed to cut about 2 million barrels per day (bpd) of production. Top exporter Saudi Arabia has just provided further evidence of its intent to keep the taps tight.

The kingdom told at least two oil refiners in Asia on Monday it would deepen oil supply cuts to as much as 10 percent of normal contracted volumes in January versus a 5 percent cut in December supplies. It also reduced January supplies to some European refiners.

But OPEC may need to make an additional cut of as much as 2 million bpd to bolster prices in a market where demand is falling.

“The current downturn in prices has already priced in at least a 1.5 million bpd cut,” Tetsu Emori, a commodities fund manager at Japan’s Astmax Co. Ltd, said.

Monday’s rally spanned the commodities complex, with gold and copper rebounding strongly. European shares were firmer after strong gains in Asia.

Oil’s steep losses on Friday followed a U.S. employment report which showed the heaviest job losses in 34 years in the world’s top energy consumer.

But global markets have taken heart from efforts by Washington to finalize a rescue for the struggling U.S. auto industry.

Oil could also find support from predictions of a cold winter in the United States, with December set to be the coldest since 2000 on average.

Jane Merriman, Osamu Tsukimori, Jonathan Leff
LONDON, Dec 8 (Reuters)

“Oil prices have witnessed a dramatic collapse – unprecedented in speed and magnitude,” OPEC said, adding that prices have fallen to levels that could jeopardize “many existing oil projects and lead to the cancellation or delay of others, possibly resulting in a medium-term supply shortage.”

The 1.5 million-barrel daily reduction exceeded the expectation of many analysts, but failed to rally crude prices which have plummeted 57% since hitting a record high record high of $147.27 a barrel on July 11.  Light, sweet crude for November delivery fell $3.09, or 4.55%, to settle at $64.75 a barrel on the New York Mercantile Exchange Friday.

“The financial crisis is already having a noticeable impact on the world economy, dampening the demand for energy, in general, and oil in particular,” the cartel said. “This slowdown in oil demand is serving to exacerbate the situation in a market which has been over-supplied with crude for some time.”

On Oct. 10, the International Energy Agency (IEA) lowered its forecast for 2008 global demand growth by 250,000 barrels per day (bpd) to 440,000. The agency cut its 2009 growth forecast by 190,000 bpd to 690,000.

In its October report, OPEC reduced its forecast for 2009 demand by 190,000 barrels a day, as well. It was the cartel’s seventh-consecutive forecast reduction. OPEC said that total oil consumption in developed countries fell by more than 1 million barrels per day in the 12 months through to the end of September.

Developed nations in 2009 will need only 400,000 barrels a day more oil than this year, the cartel said, whereas demand from emerging markets will increase by an estimated 1.1 million barrels.

The cut announced Friday, effective Nov. 1, was at the high end of analysts’ expectations, but as prices continue to slide, there is now a growing sense that the reduction won’t be enough.

Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut, told Bloomberg News that a further reduction of 500,000 barrels a day is possible.

“If prices continue to fall, they may find themselves having to revisit deeper production cuts,” Armstrong said.

OPEC President and Algerian Oil Minister Chekib Khelil said at a news conference that the cuts could reach 1.8 million barrels per day by the end of the year, which would mean an additional cut of 300,000 barrels a day, perhaps at the group’s next meeting in December. He denied that there would be any impact on inflation, or growth, if such a cut were necessary, and that the cartel would be willing to increase production should prices rebound.

With control over 40% of the world’s oil supply OPEC is the arbiter of oil prices. As such, the group walks a very fine line. If the cartel pulls the reins too hard on production, it risks a price spike that would cause demand to drop even further.

“They have to be careful of cutting production in a tough [global] economy,” Phil Flynn, analyst at Alaron Trading told The Associated Press. “They could make [falling oil demand] even worse.”

However, if OPEC overproduces, the price of oil could collapse, just is it did 11 years ago. In 1998, the price of crude skidded 28% over a 10-month period, below $10 a barrel, after OPEC raised quotas in the face of the Asian financial contagion. Oil prices that low make it unprofitable for corporations to begin new projects or seek out new oil sources.

A lack of exploration and development would make the world vulnerable to an energy shock when the global economy regains traction and demand picks back up. In fact, many analysts believe that even at current prices enough projects will be delayed, and enough investment curtailed, to spur a serious rebound in oil prices within the next few years.

Barclays Capital, for one, said the world faces “a serious supply-side crunch” within a few years when world demand comes back online.

“The dominant market view remains that sub-$70 short run prices are a stop on what might be a circuitous route back above $90, not a wind-swept motel on the route to even lower prices,” Barclays said.

Source: OPEC Cuts Output by 1.5 Million Bpd as Oil Prices Slump

But they were wrong. The Datastream Internet Index reached its peak on January 3, 2000, and then collapsed, falling 93.8% over the next 34 months.

In 2005, investors thought the real estate market was “different.” Homeowners were buying houses more expensive than they could afford because they thought inflation would protect them. While home prices could stagnate, they wouldn’t go down.

But, as you know, they were wrong. Beginning July 2006, real estate has fallen 16.2%.

Investors will come up with any excuse to continue pumping money into a sector that’s produced amazing returns for them in the past. And when the money starts piling in, it’s time for you to get out.

Today, the sector is oil. In inflation-adjusted terms, the price of oil is up 140% in the last 18 months. At first glance, the logic seems plausible…

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Global demand for oil is surging. Most of this increase comes from emerging economies like China and India. And global oil supply is on the decline. A large cause is poor reserve management by nationalized oil companies.

Venezuela’s oil production, for example, decreased by at least 1 million barrels per day (bpd) since President Hugo Chavez nationalized the country’s oil fields between mid-2006 and 2007. And Iran’s leaders can’t attract private capital and technology, so production is down 3 million bpd to half of what it used to be under the Shah.

Russia and Nigeria are in the same boat… The problem is, high oil prices make governments greedy. They take over oil fields and mismanage them, decreasing supply growth… and leading to even higher oil prices.

This imbalance has catapulted the price of oil to stratospheric levels. Even when adjusted for inflation, the price of crude oil is now far above its 1980 peak.

In the long run, simple economics tells us the price of a barrel of oil should equal the cost of producing the most expensive barrel of oil needed to meet global demand.

According to the Energy Information Administration (EIA), the oil market has a small surplus of existing production. And according to a Dallas Federal Reserve economist, the most expensive barrel of oil needed to meet global demand is being produced at just $50. With oil currently priced at $137 a barrel, the incentive to find and produce more oil is enormous.

This process takes time… But there are already signs supply is climbing. Shale oil in the Dakotas and in the Canadian tar sands – which costs about $70 a barrel to produce in both places – is attracting enormous amounts of investment capital.

In addition, research into the process of converting coal to oil might yield a more environmentally friendly process sometime in the near future, which would overcome one of the major hurdles facing coal-to-oil production now. The supply of coal in the U.S., if you were wondering, is plentiful.

From the demand side, the EIA reports consumption in 30 developed countries has fallen 460,000 bpd since last year. Most of that decline comes from plummeting U.S. demand.

This commodity rally – and the oil boom in particular – is not any different than previous booms. The market will find a new equilibrium, and the price of oil will undergo a nasty correction.

Good investing,

Ian

P.S. As my colleague Matt Badiali explained in a recent DailyWealth essay, don’t confuse brains with a bull market. If you own oil and gas stocks, now’s the time to keep an eye on your stops. On the other hand, the market has mauled refiners. But I think right now, refining stocks are perfectly positioned for the coming oil rout.

Source:  Why Oil May Be Headed for $50