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OPEC Stalemate Causes Oil Futures to Soar

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June 8, 2011 by   Leave a Comment

Crude oil rose the most in three weeks after the Organization of Petroleum Exporting Countries (OPEC) failed to reach an agreement on production targets for the first time in at least 20 years at their meeting in Vienna today (June 8), according to a report on Bloomberg.

Futures increased as much as 2.8% after Mohammad Aliabadi, the acting Iranian oil minister and current OPEC president, said the group will maintain current output for now. A Gulf delegate said yesterday that OPEC was going to raise quotas. A U.S. government report showed a bigger-than-forecast supply drop.

“The market is higher because OPEC failed to raise production today and we got a bigger-than-expected fall in inventories,” said Kyle Cooper, director of research at IAF Advisors in Houston. “You’re seeing the big reaction to the OPEC news because a quota increase has been expected.”

Crude oil for July delivery rose $2.59, or 2.6%, to $101.68 a barrel at 12:40 p.m. on the New York Mercantile Exchange. The contract is heading for the biggest gain since May 18. Prices are up 41% in the past year.

Brent crude oil for July delivery climbed $1.58, or 1.4%, to $118.36 a barrel on the London-based ICE Futures Europe exchange.

Saudi Arabian Oil Minister Ali Al-Naimi, representing OPEC’s biggest producer, said his country is ready to supply whatever the market needs.

“It was one of the worst meetings we’ve ever had,” al- Naimi told reporters. “We were unable to reach an agreement.”

Saudi Arabia, together with Kuwait, Qatar and the United Arab Emirates, were ready to supply more oil to the market, al- Naimi said. The four nations proposed a 1.5 million-barrel-a-day increase from the current 28.8 million. That would have meant an increase in output to 30.3 million barrels a day, he said.

Libya, Angola, Ecuador, Algeria, Iran and Venezuela were opposed to an increase, Naimi said.

“More oil is going to quietly come out of the Gulf,” said Rick Mueller, a principal with ESAI Energy, LLC in Wakefield, Massachusetts. “They are concerned about rising demand in the third and fourth quarters and don’t want to see the market starved and see prices rise to such a high level that they hurt economic growth.”

Global oil demand will climb to 89.18 million barrels a day during the third quarter, the highest level of 2011, the U.S. Energy Department said yesterday.

OPEC’s failure to agree to increase quotas shows that some of the group’s members have limited spare capacity, JPMorgan Chase & Co. said.

It will be a “stretch” for Saudi Arabia to add on its own the 1.9 million barrels a day of production needed to meet the 30.87 million demand OPEC forecasts for its oil in the third quarter, JPMorgan analysts including Lawrence Eagles wrote in a note today. The bank reiterated its forecast that oil will reach $130 a barrel this year.

“The knee-jerk reaction to the OPEC news is probably a little overdone,” said Carl Larry, director of energy derivatives and research with Blue Ocean Brokerage LLC in New York. “It does show that there’s dissension among the members. We’re trading more on the political implications of the meeting than any changes in physical oil supply.”

OPEC’s failure to reach a decision on targets shows Iran has increased its stature within the group, according to Petromatrix GmbH. Iran has replaced Saudi Arabia as the most influential member, Olivier Jakob, managing director of the Geneva-based research group, said today in an interview.

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