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Oil falls below $40 as OPEC mulls options

U.S. oil prices fell a dollar Thursday as OPEC’s president said the cartel was considering a big output increase to make a “psychological impact.”
/ Source: Reuters

U.S. oil prices fell a dollar Thursday as OPEC’s president said the cartel was considering a big output increase to make a “psychological impact.”

U.S. Energy Secretary Spencer Abraham also helped fuel a 2.5 percent sell-off when he said he saw signs of extra supplies from Mexico, Nigeria and Russia, as well as those already promised by Saudi Arabia.

U.S. light crude settled down $1.26 at $39.44 a barrel, extending profit-taking by hedge fund speculators from last week’s $41.85 peak. London Brent shed 83 cents to $36.25 a barrel.

“It’s too early to say yet whether or not this is the beginning of a big sell-off,” said Doug Leggate at Citigroup in New York.

“But what’s going to make speculators take their money off the table is when they see the physical oil, and there are signs from OPEC of just that.”

OPEC President Purnomo Yusgiantoro said producers would probably need to raise supply allocations by more than 2.3 million barrels per day, or 10 percent, to have any hope of denting bulls’ enthusiasm.

He acknowledged that, with estimates of OPEC production already that much over official output limits, anything less than 2.3 million would do little to reassure the market.

The options being considered for a meeting of the Organization of the Petroleum Exporting Countries on June 3 in Beirut were for increases of 2 million bpd, 2.3 million or more than 2.3 million, Purnomo said.

“The third (option is) we have a significant increase so as to give a psychological impact to reducing oil prices,” he said.

Leading OPEC member Saudi Arabia has already made a commitment to deliver real extra volumes of about 10 percent in June, taking its production to 9.1 million bpd, whatever OPEC decides. It wants OPEC to raise quota limits by 2.0 million to 2.5 million bpd.

Speaking in Moscow, U.S. Energy Secretary Abraham said the Saudi increase would have a “significant effect on oil prices.”

“We also have positive signs from Mexico, Nigeria and Russia that production will rise to meet the global demand,” Abraham told reporters.

Nigeria can add 300,000 bpd in the short-term, industry sources in Lagos said Thursday. Mexico said this week it is planning to squeeze out about an extra 70,000 bpd in the second half of the year.

In Russia, where deliveries have risen sharply over several years, top energy official Viktor Khristenko said there was little extra export capacity because of pipeline bottlenecks.

Underlying worries about supply security in the Middle East were underlined by a statement purporting to come from an Al Qaeda leader in Saudi Arabia.

The Arabic-language statement, posted on several Islamist Web sites and purportedly from Abdulaziz al-Muqrin, gave a detailed list of steps militants should take to succeed in a violent campaign against the Saudi royal family.

It was not immediately possible to verify its authenticity, but Islamist sites have in the past carried similar messages from Muqrin.

Demand strength could help keep the heat under oil prices for a while yet.

The U.S. government’s Energy Information Administration on Wednesday published weekly data showing that record-high retail prices have yet to cut demand for motor fuel.

Gasoline consumption in the year to date was up 2.9 percent at 8.925 million barrels per day (bpd), leaving an inventory deficit of 2.4 percent against last year, the EIA said.

“The upward impetus has slowed for the moment, but I haven’t come across anybody in the market who is reassessing their long term view,” said Paul Horsnell of Barclays Capital.