Oil Falls on Concern OPEC May Maintain Output as Demand Slows

May 26 (Bloomberg) -- Crude oil fell on concern that OPEC will maintain production targets at current levels this week even as the global recession curbs fuel demand.

OPEC is unlikely to change output quotas at its May 28 meeting, and talk of overly high inventories is exaggerated, said a Persian Gulf oil official with knowledge of the matter. The International Energy Agency forecast this month that world oil consumption this year will drop by the most since 1981.

“The expectation that OPEC won’t change its output quotas can be viewed as bearish because inventories are indeed high,” said Victor Shum, a senior principal at oil industry consultants Purvin & Gertz Inc. in Singapore. “Most traders do feel that the fundamentals aren’t supportive of the current level of pricing. That’s adding to the downward pressure.”

Crude oil for July delivery fell as much as 84 cents, or 1.4 percent, to $60.83 a barrel on the New York Mercantile Exchange, and was at $60.85 at 1:35 p.m. in Singapore. The exchange will combine yesterday and today’s trading for settlement purposes as floor trading was shut yesterday in the U.S. for Memorial Day.

Crude oil inventories held by the 28 members of the International Energy Agency rose to 62 days of demand in the first quarter, according to the adviser’s report on May 13. That is up from 54 days in the year ago period and from 58 days in the fourth quarter of 2008.

“We could start to see the market moving from non- fundamental to fundamental factors,” said Mark Pervan, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne. “A move away from the influence of equity markets toward more seasonal demand impacts.”

Driving Season

Refinery operations typically climb for the peak gasoline- consumption period, which lasts from the Memorial Day weekend, the traditional start of the U.S. summer travel season, to Labor Day in September.

Crude oil in New York may rise to $77 a barrel over the next several months as futures contracts “correct” the decline from a record $147.27 in July, according to technical analysis from MF Global.

Oil may first climb to $71.75 a barrel, the level reached on Nov. 4, P.A. Rajan, a Singapore-based technical analyst at MF Global, said in a telephone interview yesterday. Crude could reach $77, near the level equal to the so-called Fibonacci retracement of 38.2 percent of oil’s decline from the July record, or $76.28 a barrel.

“An overhang of inventories built up at sea and continuously poor economic data encourages selling because the rally looks unsustainable,” said Harry Tchilinguirian, BNP Paribas’s senior oil-market analyst in London.

Saudi Arabia

Saudi Arabia, the largest producer in the Organization of Petroleum Exporting Countries, is “absolutely fine” with adherence to the group’s 4.2 million barrel-a-day production cut, Oil Minister Ali al-Naimi said May 24.

Saudi Arabia is producing more crude oil than its OPEC quota, according to data from the Joint Oil Data Initiative, citing figures submitted by the country.

OPEC, responsible for 40 percent of global crude supply, is likely to keep output quotas unchanged for a second time this year as recovering oil prices forestall the need for new cuts, according to a Bloomberg survey published on May 22.

At the last summit on March 15, the group decided to leave quotas unchanged and adhere to its commitment to restrict supply.

Natural gas, heating oil and gasoline also fell in New York trading. Natural gas for June delivery fell 5 cents, or 1.4 percent, to $3.465 per million British thermal units.

The U.S. currency earlier rose against the euro after North Korea said it conducted a “successful” nuclear weapons test, spurring demand for the relative safety of the dollar and reducing the attractiveness of commodities as an inflation hedge.

The dollar had gained after North Korea announced the test, the second time Kim Jong Il’s regime detonated a nuclear device. The yen fell from near its highest level in more than two months, weakening to 94.87 per dollar by 4:50 p.m. in New York.

Brent crude for July settlement fell as much as 41 cents, or 0.7 percent, to $59.80 a barrel on London’s ICE Futures Europe exchange.