Oil Market May Need 2010 OPEC Boost, Bernstein Says (Update1)

Feb. 18 (Bloomberg) -- OPEC may be called upon to boost output in early 2010 to meet oil demand after a decline in operating U.S. rigs causes production volumes to fall, according a Sanford C. Bernstein & Co. report today.

Well shut-ins are “expected to grow markedly from March onward” as the cost of producing, transporting and paying taxes on the oil surpasses the price received for it, according to the analysts, led by Neil McMahon at Bernstein Research in London.

U.S. rigs exploring for or producing oil have dropped by 38 percent since Nov. 7, according to Feb. 13 data published by Baker Hughes Inc. Oil rigs fell by 10, or 3.5 percent, last week to 273, the lowest since June 22, 2007. Oil prices have fallen 22 percent this year and 64 percent in the past year.

During the last major oil-price decline in the late 1990s, the oil rig count dropped 77 percent over 24 months, the analysts said. That it’s down 38 percent in less than four months “suggests that volume shut-ins could occur more swiftly and steeply this time around.” Most affected will be oil production in Texas’s Permian Basin, California and the Midwest, they said.

If the shut-ins accelerate, “we expect this will help tighten the global supply/demand balance to the point where OPEC spare capacity may be called upon to satisfy recovering global demand by early 2010,” the analysts said. “At this point, declining spare capacity and more robust demand should support oil prices above the cash cost.”

Crude oil for March delivery dropped 31 cents, or 0.9 percent, to settle at $34.62 a barrel at 2:46 p.m. on the New York Mercantile Exchange. The more-active April contract lost $1.13, or 2.9 percent, to $37.41 a barrel. March futures expire at the close of floor trading on Feb. 20.

Futures fell on speculation that a government report tomorrow will show U.S. supplies climbed for the 19th time in 21 weeks as the recession cuts demand.