Crude Oil Rises on Speculation OPEC Cuts Will Reduce Supplies

BLUE CROWN FUTURES

By Mark Shenk

Jan. 23 (Bloomberg) -- Crude oil rose to a two-week high on speculation that stockpiles will decline as OPEC implements promised production cuts and investors purchased commodities as an alternative to stocks and bonds.

The Organization of Petroleum Exporting Countries will curb supplies by 5.4 percent this month to 26.15 million barrels a day, according to preliminary estimates from consultant PetroLogistics Ltd. Gold led commodities higher today as the deepening recession left few investment options.

“A lot of the surplus supply will probably disappear in a few months because of the OPEC cuts,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. “This is a very low OPEC number. They are serious about taking this problem on and will do whatever they think is necessary to support prices.”

Crude oil for March delivery rose $2.80, or 6.4 percent, to $46.47 a barrel at 2:51 p.m. on the New York Mercantile Exchange, the highest settlement since Jan. 6. The contract rose 9.2 percent this week. Prices are up 4.2 percent this year and are 47 percent lower than a year ago.

Starting this month, the OPEC members with production targets, all except Iraq, have a combined quota of 24.845 million barrels a day. The 12-member group needs to make the deepest supply cuts in its history to comply with the revised quotas.

Commodity Rally

“Just about every commodity, with the exception of natural gas, is up today,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “You are seeing a rush of funds going from treasuries to gold and other commodities as investors look for a safe haven.”

U.S. stock indexes declined this week. The Standard & Poor’s 500 average dropped 2.1 percent since Jan. 16 to 831.95.

Treasuries fell, with 30-year bonds heading for the biggest weekly loss in 26 years, on concern that debt sales will increase as the U.S. government boosts spending to ease the deepening economic slump.

Gold futures for February delivery climbed $37, or 4.3 percent, to settle at $895.80 an ounce on the Comex division of the Nymex, the biggest gain since Dec. 10.

The Reuters/Jefferies CRB Index of 19 commodities rose as much as 3.4 percent today to 226.05, the highest since Jan. 12.

The price of oil for delivery in April is $2.74 a barrel higher than for March, up from a $2.16 premium yesterday. December futures are up $10.03 from the front month, versus $10.23 yesterday. This structure, in which the future month’s price is higher than the one before it, is known as contango, and is often an indicator of oversupply.

“The contango shows that people expect the economy to be bad for a while,” said Kyle Cooper, an analyst at IAF Advisors, an energy consultant in Houston. “It shows they don’t expect demand to rebound until late this year or 2010.”

Higher Volume

Volume in electronic trading on the exchange was 421,169 contracts as of 3:02 p.m. in New York. Volume totaled 613,758 contracts yesterday, up 27 percent from the average over the past 3 months. Open interest yesterday was 1.23 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.

Brent crude oil for March settlement increased $2.98, or 6.6 percent, to $48.37 a barrel on London’s ICE Futures Europe exchange, the highest settlement since Jan. 6.

Crude-oil supplies rose four times more than forecast to the highest since August 2007 as refineries cut operating rates, the Energy Department said yesterday.

“An indicator that the market possesses inherent strength is its strong performance in the face of bearish information,” said Michael Fitzpatrick, vice president for energy at MF Global Ltd. in New York.

Fuel Demand

Fuel demand in the U.S., the world’s biggest oil-consuming country, averaged 19.4 million barrels a day during the four weeks ended Jan. 16, down 4.7 percent from a year earlier, yesterday’s Energy Department report showed.

“The big question right now is when demand is coming back,” said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $9 billion natural-resource-company bond portfolio. “Until the economy reaches a bottom and we begin to see a recovery, energy prices will remain under pressure.”

Heating oil prices advanced, helping pull crude oil higher, after cold weather forecast for the northeastern U.S. will force some commercial and industrial natural gas customers to switch to heating oil to meet demand.

Heating oil for February delivery rose 10.19 cents, or 7.6 percent, to end the session at $1.4505 a gallon in New York. Gasoline futures for February increased 6.1 cents, or 5.6 percent, to settle at $1.1544 a gallon.

Regular gasoline at the pump, averaged nationwide, was unchanged at $1.85 a gallon, AAA, the largest U.S. motorist organization, said on its Web site today. Prices have declined 55 percent from the record $4.114 a gallon reached on July 17.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Last Updated: January 23, 2009 16:27 EST