OPEC wants floating storage gone before raising output

Oct 21, 2009 02:00 AM

Organization of Petroleum Exporting Countries (OPEC) wants to see oil stored at sea disappear before it considers raising production to stem the rally in prices, Secretary-General Abdalla El-Badri said.
The OPEC sees "no shortage of oil in the market" El-Badri told at the Oil & Money conference in London. The rally to a one-year high above $ 80 a barrel today is driven by higher equities, the sliding dollar and speculation, he said.

OPEC, responsible for about 40 % of the world's crude supply, isn't comfortable with oil prices above $ 80 because they will restrain global economy recovery, El Badri said. Still, the group won't raise production at its meeting in Angola in December unless the 125 mm barrels of crude and fuel that remains in floating storage are gone, he said. In addition, conventional stockpiles need to drop.
"Anything above $ 80 will really hamper economic growth," El-Badri said. "Watch the floating storage, if that is eliminated, and watch the stocks, if they are at 52, 54 days, then OPEC will take action."

Crude oil for November delivery rose as much as 44 cents, or 0.6 %, to $ 80.05 a barrel in electronic trading on the New York Mercantile Exchange, the first time the front-month contract has traded above $ 80 since October. Prices have rallied 78 % this year.
"The oil price going further up from here is perhaps the biggest risk to the global economic recovery," said Kaha Kiknavelidze, a managing partner at London-based Rioni Capital Partners, a hedge fund that specializes in emerging markets.

Traders including Total and Arcadia Petroleum have hired oil tankers to store crude and fuel at sea because futures markets price oil in the months ahead above supply for immediate delivery, a situation known as contango. In addition, land based inventories have risen to higher-than-usual levels as the recession cut demand.
At the end of August, industrial stockpiles held by members of the Organization of Economic Cooperation and Development were the equivalent of 60.7 days of consumption, compared to 61.4 days in July, the International Energy Agency said in its last report.

Stockpiles show the rally in prices isn't based on supply and demand, El-Badri said. The group supports moves in the US to place limits in the positions so-called speculators can take in oil markets, he said.
"We hope this will be under control very soon. OPEC has 6 mm to 7 mm barrels of spare oil production capacity "that can be put into the market straight away," El Badri said in a speech at the conference.

Crude demand is recovering slightly as the economy picks up, and oil prices are likely to remain in their current range "with a slight upward drift," BP Chief Economist Christof Ruehl said.
El-Badri said OPEC members should stick more closely to quotas. Compliance slipped to 62 % in September, according to data given in OPEC's in September report. The group's 12 members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates andVenezuela. The group is scheduled to meet again on December 22 in Luanda.

Seven of the 35 oil projects delayed in member countries after oil slumped last year have now been revived because of the rally in prices, he said, adding the group is working on 150 projects to boost spare capacity. The world needs more investment in oil production to meet future demand for energy, International Energy Agency executive director Nobuo Tanaka said at the conference.
"We need oil," he said.

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