Crude Oil Declines on OPEC Production, Drop in U.S. Equities

May 28 (Bloomberg) -- Oil fell in New York, snapping two days of gains, after Saudi Arabia’s oil minister said OPEC doesn’t need to cut output and U.S. stocks slumped because of concern higher borrowing costs may hinder an economic recovery.

Oil demand is starting to recover, removing any need to reduce production, Ali al-Naimi said yesterday in Vienna. U.S. benchmark stock indexes dropped on a jump in long-term borrowing costs. The 10-year Treasury note declined for a fourth day, sending its yield to a record spread above two-year notes.

“There is a very high correlation with equities,” Mark Pervan, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne, said in an interview with Bloomberg Television. “Contrary to what OPEC is saying, demand remains very weak.”

Crude oil for July delivery dropped 58 cents, or 0.9 percent, to $62.87 on the New York Mercantile Exchange at 10:20 a.m. in Sydney. Yesterday, the contract rose $1, or 1.6 percent, to settle at $63.45 a barrel, the highest since Nov. 5.

The Organization of Petroleum Exporting Countries is likely to keep output quotas unchanged for a second time this year at its meeting that starts in the Austrian capital today, according to a Bloomberg survey published on May 22. Saudi Arabia is the biggest and most influential member of OPEC.

The S&P 500 dropped the most in two weeks, losing 1.9 percent, and the Dow Jones Industrial Average sank 2.1 percent. General Motors Corp. had the biggest drop in both gauges after failing to persuade enough bondholders to exchange debt for equity, pushing the company closer to bankruptcy.

Fresh Cuts

Venezuelan Oil Minister Rafael Ramirez said a fresh cut may be needed later this year because the market remains oversupplied by about 1 million barrels a day. Today’s meeting will focus on 100 percent compliance with existing production targets, he said.

OPEC, whose members supply 40 percent of the world’s oil, has yet to complete output cuts totaling 4.2 million barrels a day that the group agreed to late last year. The production ceiling is 24.845 million barrels a day for 11 of its members. They pumped 25.812 million barrels a day in April, a May 13 report from the group showed. Iraq has no quota.

The group’s members need to complete production reductions because oil prices haven’t yet reached the desired level of $70 to $75 a barrel, OPEC President Jose Maria Botelho de Vasconcelos said yesterday in Luanda, Angola.

Iranian Oil Minister Gholamhossein Nozari said the group is unlikely to alter output at the meeting. Iran is OPEC’s second- biggest oil producer.

$80 Oil

Oil is likely to rise to $80 as the growth trend in fuel demand outpaces supply, according to Paul Horsnell, head of commodities research at Barclays Capital.

“Higher oil prices are not going to be helpful to the economic situation,” Howard Gruenspecht, the acting head of the Energy Department’s Energy Information Administration, said in Washington yesterday.

The U.S. recession will probably end in the third quarter, a survey of business economists showed. The world’s largest economy and energy consumer will begin to expand next quarter, according to 74 percent of economists in a National Association for Business Economics survey.

Current prices are “reflecting some optimism from financial markets that we may have bottomed out in terms of the recession,” Didier Houssin, the International Energy Agency’s director of Energy Markets and Security, said at a conference in Paris. “The driving season is coming in the U.S. and some people think it may be more significant than last year because of lower prices at the pump” and inventory declines, he said.

Supplies Drop

Oil supplies fell 2.82 million barrels to 364.7 million in the week ended May 22, the industry-funded American Petroleum Institute said yesterday. U.S. gasoline supplies dropped 758,000 barrels last week to 205.4 million, the API said.

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

The Energy Department is scheduled to release its supply report today at 11 a.m. in Washington, a day late because of the Memorial Day holiday.

U.S. gasoline supplies dropped 1.3 million barrels last week, according to the median of 13 estimates by analysts before the Energy Department report. Inventories fell 6.1 percent in the previous four weeks. Analysts were split over whether crude supplies rose or fell in the week ended May 22.

Brent crude for July settlement rose $1.26, or 2.1 percent, to end yesterday’s session at $62.50 a barrel on London’s ICE Futures Europe exchange. It was the highest settlement since Nov. 4.