Oil Rises to Five-Week High on Gaza Attacks, OPEC Output Cuts

Jan. 5 (Bloomberg) -- Crude oil rose to a five-week high on speculation that the conflict in the Gaza Strip may spread, disrupting oil supplies from other parts of the Middle East, and on signs that OPEC production cuts are being implemented.

Oil gained as Israeli warplanes bombarded Palestinian targets and thousands of soldiers moved into Gaza. The Organization of Petroleum Exporting Countries is likely to make all the output cuts promised at its last meeting, causing global stockpiles to fall this quarter, an official from a Persian Gulf member of the group said.

“The issues on the Nymex are a combination of anticipation that the OPEC cuts are going to bite and fear that the conflict between Israel and the people in the Gaza Strip may impact oil markets,” said Ed Morse, managing director and chief economist at Louis Capital Markets LP in New York. “In both cases, the link to the Nymex price is either premature or unwarranted.”

Oil for February delivery rose $2.47, or 5.3 percent, to $48.81 a barrel at 2:47 p.m. on the New York Mercantile Exchange, the highest settlement since Dec. 1. Earlier, the contract touched $49.28 a barrel. Prices have rallied 38 percent since Dec. 24.

Full implementation of OPEC’s 4.2 million-barrel-a-day reduction in supplies will send inventories below their five-year average, said the official with direct knowledge of OPEC’s deliberations, declining to be identified by name because he isn’t authorized to speak publicly. It’s unlikely the group will convene before its scheduled meeting on March 15, he said.

OPEC Cuts

The cutback is from OPEC’s September production levels and includes a reduction that took effect Nov. 1. The group agreed to a record cut of 2.46 million barrels a day at a meeting in Oran, Algeria, on Dec. 17. OPEC produces more than 40 percent of the world’s oil.

Morse said the fair-market price for crude was “in the upper $30s or low $40s,” as he anticipates “persistent fundamental weakness” and “persistent commercial stock builds” in January.

Crude fell earlier as the U.S. dollar rose to a three-week high against the euro, reducing the appeal of commodities as a hedge. The currency moved on speculation that President-elect Barack Obama’s fiscal stimulus package will help the U.S. economy recover from a recession.

Volume in electronic trading on the exchange was 388,081 contracts as of 3:15 p.m. in New York. Volume totaled 303,667 contracts on Jan. 2, down 35 percent from the average over the past 3 months.

Saudi Aramco

Saudi Arabian Oil Co., the world’s largest state-owned oil company, raised the official selling prices for shipments of so- called heavy crude grades for February.

The company increased the prices for all of its grades to the U.S., according to a statement from its headquarters in Dhahran. Saudi Aramco, as the company is known, increased the price of its Arab Medium and Arab Heavy types to Asia and Europe. The price for its so-called lighter grades was left unchanged or reduced for shipments to Europe and Asia.

“The Saudis are raising the price of their lower-end crudes, which means they’re cutting supply,” said Roger Read, an analyst at Natixis Bleichroeder Inc. in Houston. “You tell people that the price is $3 more a barrel, and they say they don’t want it. That’s how you cut.”

Venezuelan President Hugo Chavez said today that OPEC countries are “very united” and that Russia, the second-largest oil producer after Saudi Arabia, is working with the 12-member organization in its effort to support prices.

Oil climbed 23 percent last week, the most since August 1986, buoyed by the Gaza conflict, a natural gas dispute between Russia and Ukraine, and a rebound in equity prices. Futures tumbled 27 percent the week before.

Oil’s ‘Low Point’

“Signs are increasing that oil has already passed its low- point, that we won’t go below $40 again,” said Hannes Loacker, an analyst at Raiffeisen Zentralbank Oesterreich in Vienna. “We may see a bit of a turnaround now with the demand concerns in developed markets.”

Obama’s economic stimulus package will include hundreds of billions of dollars worth of tax breaks for individuals and businesses, according to a transition official and Democratic aides.

Obama is asking that tax cuts make up 40 percent of a stimulus package, the people say. The measure may be worth as much as $775 billion, a Democratic aide said, meaning tax cuts may constitute more than $300 billion of the legislation.

“The economic front still looks to be bearish,” said Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut. “The trend is still lower, though some factors are mitigating the downward bias.”

Forward Curve

The so-called forward curve of futures contracts traded on the Nymex suggests oil will rise 28 percent to $60.10 a barrel by December, according to data compiled by Bloomberg.

The curve looks almost the same as 10 years ago, after Russia’s default and the collapse of the Long-Term Capital Management LP hedge fund raised concerns that a global economic slowdown would reduce energy demand.

Crude prices fell 25 percent in the final quarter of 1998, the steepest drop in seven years.

Brent crude oil for February settlement added $2.71, or 5.8 percent, to $49.62 a barrel on London’s ICE Futures Europe exchange. It touched $50.05 a barrel, the highest since Dec. 1.