Saudi Arabia’s oil minister, Ali Naimi, has indicated that while demand is beginning to pick up, inventories remain dangerously high. Therefore, it would be best for the cartel to “stay its course” by continuing to adhere to previous production cuts until demand stabilizes.

After soaring above $147 a barrel last summer the price of oil tumbled more than 80% to a four-year low of $32.70 a barrel in February. To combat the sharp decline in prices, OPEC has lowered its production quotas by 4.2 million barrels per day (bpd) – about 5% of global demand – since September.

Since February, oil prices have recovered, climbing to their current level above $60 a barrel. But both Naimi and industry analysts have warned that the rally has more to do with market sentiment and the potential for a recovery than it does fundamentals.

“The price rise is a function of optimism that better things are coming in the future,” Naimi told reporters earlier this week.

The International Energy Agency (IEA) estimates global oil consumption will fall by 2.6 million bpd this year. That would be the biggest drop since 1981.

Naimi says that world crude inventories – at current levels – would be sufficient enough to meet about 62 days of global demand. OPEC members would like to see them fall to about 52 to 54 days worth of demand.

An increase in OPEC production “will not happen until we are sure that global inventories return to their normal levels,” Naimi told the Arab daily Al-Hayat.

U.S. crude oil inventories rose to the highest level in two decades earlier this month. However, Naimi did note that demand in Asia, particularly China, seems to be accelerating and crude prices could reach $75 a barrel by the end of the year.

Still, analysts are urging caution, as production quota compliance among OPEC nations is beginning to wane. Production compliance among OPEC nations reached 85% in March – an impressive level by historical standards. Members only delivered on 78% of the promised cuts in April as prices recovered.

Saudi Arabia, OPEC’s largest and most influential producer, actually pumped below its target level in April, but other members have been cheating. Iran, OPEC’s second-biggest producer, accounted for 410,000 bpd of the overproduction last month, while Angola exceeded its target by 170,000 bpd and Venezuela overproduced 130,000 bpd the IEA reported.

“Lagging quota compliance by the non-Gulf Arab states – hovering around 50% – has hamstrung any real discussion of a potential cut to accelerate the drawdown of the glut,” PFC Energy analyst David Kirsch said in a report today. “Purported requests by Angola to revise or suspend its quota, as well as moves by Venezuela to certify a higher production figure leave any proposal for further output restraint effectively stillborn.”

Source: OPEC to Maintain Production Levels at Thursday Meeting

Light, sweet crude for January delivery fell $3.54 to settle at $40.06 a barrel on the New York Mercantile Exchange – the lowest level since 2004. Oil futures actually traded as low as $39.88 during the day yesterday. The slide came in spite of an announcement by OPEC that the cartel would cut its production quotas by 2.2 million barrels per day (bpd), a record amount.

“The Conference observed that crude volumes entering the market remain well in excess of actual demand: This is clearly demonstrated by the fact that crude stocks in OECD countries are well above their five-year average and are expected to continue to rise,” the group said in a statement. “Moreover, the impact of the grave global economic downturn has led to a destruction of demand.”

Since September, OPEC – supplier of 40% of the world’s oil – has issued three production cuts totaling 4.2 million bpd, or nearly 12% of its capacity. Still, the cartel has failed to establish a floor for oil prices, which have tumbled more than 70% from their July 11 peak of $147 a barrel. Oil has now given up all of the price gains it has made since 2004, in just the past five months.

The main reason for the decline is that the global recession has curtailed demand significantly, leaving many developed nations, as well as the cartel, with a significant buildup of inventories.

The U.S. Energy Information Agency reported yesterday that crude oil inventories increased 500,000 barrels from the previous week, while OPEC’s commercial inventories now stand at 57 days’ worth of supplies. OPEC President Chekib Khelil, said that his group wants to push inventories down to 52 days’ worth of supply and lift prices back up to $70-$80 a barrel.

However, OPEC may find it difficult to achieve those goals without help from non-OPEC nations, which balked at efforts to make a coordinated global production cut. After rumors circulated prior to the meeting that Russia and Azerbaijan might take part in the cuts, their contribution to OPEC’s effort came out flat.

“Russian oil companies have already made a decision to cut deliveries to the market… approximately equivalent to 350,000 barrels per day,” Russian Deputy Premier Igor Sechin told The Associated Press. Sechin added that the cuts had already been implemented in November.

Russia’s lack of involvement did nothing for an oil market that was crying out for a coordinated global effort. In fact, the statement came off as a thinly veiled attempt to repackage the already apparent decline in Russian oil production that has resulted from a lack of investment.

Even before Sechin’s comments, analysts had forecast a 1% decline in Russian oil output for this year, and a 2% drop in 2009.

Azeri Energy Minister Natik Aliev said it would back OPEC’s move by cutting production by 300,000 bpd, more than a third of its total capacity. Still, analysts estimate that an accident that took place on the country’s main pumping platform in October had already cost the country 500,000 bpd in output.

“We want non-OPEC countries to contribute, and not just benefit from the impact of our cuts,” a frustrated Khelil said after the meeting in Oran, Algeria. “It’s in their own interest as well as in ours.”

A lack of foreign cooperation will put even more pressure on OPEC, and could force the group to call another “extraordinary” meeting before its next scheduled gathering, set for March 25, 2009.

“I hope we surprised you,” Khelil said when asked whether the size of the cut would provide enough of a spark to ignite oil markets. “If you’re not surprised we need to so something about it.”

Source: OPEC Production Cut Fails to Inspire Oil Market; Oil Drops to Four-Year Low

The market is awaiting fresh direction from the crude oil market, which rose ahead of an expected production cut from the Organization of the Petroleum Exporting Countries (OPEC).

Spot gold was quoted at $855.60/857.60 an ounce at 1024 GMT, little changed from $857.35 an ounce late in New York on Tuesday. U.S. gold futures for February delivery were up $14.70 at $857.40.

Gold is likely to consolidate after recent sharp moves, analysts said.

“We have jumped so much in a relatively short period of time without any major changes on the fundamental side,” said Wolfgang Wrzesniok-Rossbach, the head of sales at Heraeus.

While gold was benefiting from dollar weakness and safe-haven buying as a result of the financial crisis, physical demand for bullion was tailing off as prices rose, Wrzesniok-Rossbach said.

“Fundamentally the situation might not be 100 percent positive, but everything related to the financial crisis is positive for gold.”

Gold climbed in late New York trade on Tuesday after the Fed said it was cutting rates to between zero and 0.25 percent, knocking the dollar lower and prompting further rate cuts from Hong Kong and Kuwait.

The dollar hit a 2-1/2 month low against the euro on Wednesday after the cut.

However, “technical momentum signals are warning of an upside correction for the greenback today,” said Standard Bank analyst Walter de Wet. “This could restrain precious metals.”

The other main external driver of gold, crude oil prices, were broadly supportive, ticking up $1 a barrel ahead of an OPEC decision on production quotas.

The cartel is expected to cut output by some 2 million barrels to shore up the falling oil price, which has dropped around $100 a barrel from the highs it hit earlier this year.

DEMAND MIXED

Physical demand for gold was mixed, with traders reporting falling interest in gold coins and bars in Europe and Indian buyers said to be staying away until prices fall.

However, investment demand for gold-backed exchange-traded funds was firm. The world’s largest bullion-backed ETF, the SPDR Gold Trust , said its gold holdings rose 3.98 tonnes on Dec. 16 and are up 1 percent or 7 tonnes since Friday.

Among other precious metals, platinum and palladium were little changed. The two metals, which are primarily used to make catalytic converters, have fallen sharply in recent months on fears demand would suffer from a slowdown in car sales.

Platinum is now trading close to parity with gold, a situation last seen in 1996. However, the metal is likely to recover next year, analysts said.

“Current price levels for platinum group metals are not sustainable for many South African producers unless there is a sharp weakening of the rand,” said Fairfax analyst Marc Elliott.

“Consequently the eventual recovery of the automotive market appears likely to prompt a shortage that should lift PGM prices perhaps to levels seen earlier this year.”

“However, for the next few months we see little reason for a substantial improvement, unless some major production cuts (or) disruptions take place,” he added.

Spot platinum was quoted at $856/866 an ounce against $860.50 late in New York on Tuesday, while palladium was at $176.50/181.50 an ounce against $178.

Silver fell to $10.98/11.06 an ounce from $11.21.

By Jan Harvey
LONDON, Dec 17 (Reuters)