Crude Oil Falls as OPEC Cuts Demand Forecast, Supplies Rise

Jan. 15 (Bloomberg) -- Crude oil fell to the lowest price in three weeks after OPEC said demand will drop this year and U.S. supplies rose as the recession cut fuel use.

Consumption of OPEC crude will shrink 4.2 percent to 29.5 million barrels a day, according to a monthly report released today. The discount of oil in New York to the Brent grade in London widened to as much as $10.79 a barrel today, a record, because of rising supplies at Cushing, Oklahoma, the delivery point for barrels traded on the U.S. exchange.

“The overriding factor impacting the market is the fact that we are in the midst of a global recession, which is buffeting the U.S., even China,” said Rachel Ziemba, an analyst at RGE Monitor, an economic research company in New York. “That’s going to be a negative for oil demand.”

Crude oil for February delivery fell $1.88, or 5 percent, to $35.40 a barrel at 2:54 p.m. on the New York Mercantile Exchange, the lowest settlement since Dec. 24. Prices are down 62 percent from a year ago.

Brent crude oil for February settlement declined 39 cents, or 0.9 percent, to settle at $44.69 a barrel on London’s ICE Futures Europe exchange. The more-active March Brent contract rose 6 cents to $47.68 a barrel.

Crude-oil inventories at Cushing, Oklahoma, where West Texas Intermediate traded on the Nymex is stored, climbed 2.5 percent to 33 million barrels last week, the Energy Department said yesterday. It was the highest since at least April 2004, when the department began keeping records for the location.

$50 WTI

“On average, we expect prices to be around $50 for WTI and Brent” this year, Francisco Blanch, head of commodities research at Merrill Lynch & Co. in London, said on Bloomberg television. “We’ve made no distinction even though the WTI market does seem oversupplied due to a number of issues around the Cushing area.”

The price of oil for delivery next December is 65 percent higher than for the front-month contract, allowing traders to profit if they can store crude. February 2009 crude ended the day at a $8.14 discount to March, from $3.88 on Jan. 5. This structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

“The front end of the Nymex is weighed down by all of the oil at Cushing,” said Tom Bentz, senior energy analyst at BNP Paribas in New York. “WTI is the weakest crude grade out there right now.”

Reduced Demand

The Organization of Petroleum Exporting Countries shaved its global demand estimate for 2009 by 20,000 barrels to 85.66 million barrels a day. That brings this year’s reduction to 180,000 barrels a day, or 0.2 percent.

“Consumption could start to stabilize and potentially start to recover a little bit toward the end of this year, maybe early into next year,” Blanch said. “Of course, this is very dependent on fiscal and monetary policies starting to yield the expected result, which is some stimulus to economic activity.”

There will be a “major contraction” in demand among members of the Organization for Economic Cooperation and Development, with the United States being the “main contributor,” to this reduction, OPEC said.

“Oil will have to drop into the high $20s before it finds its feet,” said Bill O’Grady, chief markets strategist at Confluence Investment Management in St. Louis. “We are looking at a huge drop in demand.”

U.S. fuel demand fell 6 percent last year, the biggest drop since 1980, as prices touched records and the economy contracted, the industry-funded American Petroleum Institute said today.

U.S. crude stockpiles increased 1.14 million barrels to 326.6 million barrels last week, the highest since Aug. 31, 2007, the Energy Department said yesterday. Gasoline and distillate fuel supplies also rose.

Floating Storage

Morgan Stanley is seeking a supertanker to store crude oil, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from higher prices later in the year, four shipbrokers said. Frontline Ltd., the world’s biggest owner of supertankers, yesterday said about 80 million barrels of crude oil is being stored in tankers, the most in 20 years.

OPEC agreed to a record 9 percent cut in supply targets at a Dec. 17 meeting to reverse the plunge in oil prices, which have dropped more than $100 a barrel in New York in the past six months. This week Saudi Arabia, the world’s biggest oil producer, said it will curb output by more than was announced at the December summit.

“There’s a question about how effective OPEC will be in removing the slack supply in the near term,” Ziemba said. “There’s a lot of oil on tankers and inventories are building up around the world.”

Volume in electronic trading on the exchange was 558,230 contracts as of 3:19 p.m. in New York. Volume totaled 779,370 contracts yesterday, up 63 percent from the average over the past 3 months. Open interest yesterday was 1.27 million contracts. The exchange has a one-day delay in reporting open interest and full volume data.