Oil prices edge up as firm demand counters oversupply

[SINGAPORE] Crude oil prices edged up on Tuesday due to firm demand after dipping in earlier trade on expectations that OPEC would not cut output at its meeting this week.

The Organization of the Petroleum Exporting Countries (OPEC), which controls over 40 per cent of the world's crude production, meets this Friday in Vienna, with US bank Citi saying the group was likely to maintain current output. "OPEC meets on Friday and is in no mood to cut output, Energy Aspects said on Tuesday. "The gulf between the member countries remains extremely wide, and without a contribution from everyone ... Saudi Arabia will not reduce production." But prices were supported as Saudi oil minister Ali al-Naimi said demand would pick up in the second half of the year.

JP Morgan said that firm refinery demand was also buoying prices.

Ten per cent of Canada's oil sands production, or 233,000 barrels per day, remains shut as a result of wildfires, although firefighters made progress containing the flames and workers began returning to some sites to assess damage.

Front-month Brent crude futures fell to a low of US$64.71 per barrel on Tuesday, before rising to US$65 by 0635 GMT.

US crude was at US$60.35 a barrel, up 15 cents from its last settlement. "Comments from Saudi Arabian oil minister Ali al-Naimi were characteristically upbeat, acknowledging a current surplus in the market, but anticipating stronger second half demand and an eventual rebalancing of the market," Citi said in a note responding to his comments.

The contrasting views between OPEC-members are a result of differing extraction costs, with Saudi Arabia the driving force behind keeping output high in defence of market share, while Venezuela and Iran have favoured cuts in defence of higher prices.

AB Bernstein said in a note ahead of the OPEC meeting that Saudi Arabia had the lowest OPEC extraction cost of around US$6.10 per barrel, although big government spending means it requires a much higher price to balance its budget. "Within OPEC, considering ongoing oil price levels (and) country budget spending ... Venezuela, Angola and Ecuador (currency) reserves will hardly last for a year with the least expected impact on Kuwait and Qatar," Bernstein said.

High production by OPEC, but also from other regions like US shale producers and Russia, has contributed to oversupply and left tankers filled with millions of barrels of oil without buyers.

REUTERS