Wednesday, December 10, 2008

Oil gains amid OPEC cut talk

Oil prices rose Wednesday, ahead of a government inventory report expected to show a buildup in crude supplies, as investors looked to talk about an OPEC production cut next week.

U.S. crude for January delivery rose $1.99 to $44.06 a barrel in electronic trading.

Sinking demand for crude has put pressure on the Organization of Petroleum Exporting Countries, an international trade cartel whose members produce about 40% of the world's oil, to bolster prices with a production cut.

"I think it's hurting them pretty badly," said Michael Lynch, president of energy consulting firm Strategic Energy & Economic Research Inc.

Crude prices have plummeted more than $100 a barrel since hitting a record intraday high of $147.27 a barrel in mid-July.

Investors have been worried about falling demand for crude products as the world economy slows.

OPEC nations, some of whom depend heavily on oil profits to support their domestic economies, have been scrambling to keep prices from falling further.

In October the organization pledged to cut production by 1.5 million barrels a day, and on Monday, OPEC President Chakib Khelil told the Associated Press that the oil market could expect to see a "severe" cut in production levels when the organization meets again Dec. 17.

While Khelil did not specify a number, some analysts have predicted OPEC could pledge to cut anywhere from 2 million to 3 million barrels a day.

Some question how OPEC will be able meet another production cut, since the group has not yet cut what it pledged to cut in October, according to estimates.

"The bottom line is there is a lot of cheating going on," said Peter Beutel, oil analyst with Cameron Hanover. "If [a country] can sell higher volumes at the theoretically higher price, they're going to do better."

In November, OPEC pumped about 28.16 million barrels a day, not including Indonesia, which leaves the group at the end of the year, and Iraq, according to Platts - a decline of only 950,000 barrels a day from October.

Analysts expect the Energy Department to report a 2.7 million barrel buildup of crude supplies for last week, according to a poll conducted by research firm Platts.

The government inventory report can give insight into demand levels for crude oil in the United States, the world's largest crude consumer.

Analysts also expect the report to show that gasoline supplies rose by 1.4 million barrels, and that the stockpile of distillates, used to make diesel fuel and heating oil, declined by 1.6 million barrels, according to the Platts poll.

"I think demand will be very poor," said Lynch.

It's currently cheaper for oil buyers to purchase oil immediately rather than buy a contract for future delivery. This indicates that companies are trying to get rid of excess inventory, according to Lynch, and is a sign that the oil demand is falling.

Crude was selling at $42.07 a barrel yesterday in Cushing, Okla., a major hub for oil delivered to the Gulf Coast.

"I've heard rumors that some people are holding tankers off shore so it won't show up in the data," said Lynch. By waiting until the end of the year to unload the crude, owners can get a higher price at some future date, and the deliveries aren't immediately taxed, since they don't show up on the books until 2009.

In its short-term global demand outlook, the Energy Department predicted global oil consumption will fall by 50,000 barrels a day in 2008, and by 450,000 barrels a day in 2009 - the first time in 30 years that worldwide oil demand will have fallen for 2 years in a row.

The government also revised down its prediction for 2009 oil prices, saying crude could go for an average of $51 a barrel, down from the $63.50 predicted last month.

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