Oil pares biggest rally in 25 years as Opec action doubted

[MELBOURNE] Oil's biggest three-day rally in 25 years stalled as speculation faded that Opec may coordinate supply restraint with other nations to tackle the global crude surplus.

Futures slipped 1.9 per cent in New York after surging 27 per cent in the three days through Monday, the most since August 1990. Prices fell as Chinese manufacturing slowed and US crude inventories were forecast to have increased. Crude climbed Monday after the US government lowered production estimates and the Organization of Petroleum Exporting Countries said it's prepared to speak with other producers about getting "fair" prices.

Oil will remain at US$40 to US$60 a barrel into 2016 as rising crude supplies overwhelm demand, according to Ian Taylor, chief executive officer of Vitol Group BV, the biggest independent oil trader. Iran plans to boost output by 1 million barrels a day within five months after sanctions against it are lifted, said Oil Minister Bijan Namdar Zanganeh. Opec is ready to talk to other producers to achieve "fair and reasonable prices," according to its bulletin published Monday.

"The statement is really nothing new, as Opec said that non-Opec also needs to do their part in rebalancing the market," Giovanni Staunovo, an analyst at UBS Group AG in Zurich, said by e-mail. "It would be the first time that a policy change is communicated via the Opec bulletin" instead of by officials, he said.

West Texas Intermediate for October delivery dropped as much as US$2.18 to US$47.02 a barrel on the New York Mercantile Exchange and was at US$48.28 at 12:27 a.m. London time. The contract gained US$3.98 to US$49.20 on Monday. The volume of all futures traded was more than three times the 100-day average. Prices climbed 4.4 per cent in August.

Brent for October settlement decreased as much as US$2.45, or 4.5 per cent, to US$51.70 a barrel on the London-based ICE Futures Europe exchange. It gained US$4.10 to US$54.15 on Monday. The European benchmark crude traded at a premium of US$4.57 to WTI.

US crude inventories probably rose by 700,000 barrels last week, according to a Bloomberg survey before an Energy Information Administration report on Wednesday. Stockpiles probably expanded to 451.5 million barrels through Aug 28, according to the median estimate of seven analysts surveyed by Bloomberg before the EIA report. That would keep inventories more than 90 million barrels above the five-year seasonal average.

The EIA reduced its crude production estimates by as much as 130,000 barrels a day for the first five months of the year based on results of a new survey. The US produced about 9.4 million barrels of crude a day during the first half of the year, according to the EIA's website. That's on average about 87,000 barrels a day lower than previously estimated, with March output getting the largest cut of 130,000.

Opec, supplier of about 40 per cent of the world's oil, won't agree to shoulder on its own the burden of propping up prices by cutting supply, and non-member nations would have to contribute, according to the bulletin from its Vienna-based secretariat. The group said it will protect its own interests and that there is "no quick fix" for market instability.

Opec may shift policy and reduce output to keep Brent crude above US$50 a barrel if demand in emerging economies falters, Bank of America Corp. said. Saudi Arabia, the group's biggest member and architect of the current strategy to defend market share, "cannot sustain its spending sub-$40 a barrel for very long," the bank said.

Iran, an Opec member, plans to raise its crude output by 500,000 barrels a day once international sanctions are lifted and by 1 million barrels a day within five months of that, said Zanganeh, its oil minister. The nation is pumping 2.8 million barrels a day, the most in three years, and exporting more than 1 million a day, he said in an interview.

A drop in a Chinese factory gauge to the lowest in three years prompted speculation that the economy in the world's second-biggest oil user is slowing. China's official Purchasing Managers' Index was 49.7 for August, matching the median estimate in a Bloomberg survey and down from 50 in July. Numbers below 50 indicate contraction, with small, medium and large enterprises all below that level last month.

The oil-production surplus means stockpiles will keep expanding for "the next few quarters" and excess inventories won't clear until 2017 at the earliest, Vitol's Taylor said in an interview. Vitol handles more than 5 million barrels a day of crude and refined products - enough to cover the needs of Germany, France and Spain together.

The Chicago Board Options Exchange Crude Oil Volatility Index closed at 54.37 Monday, the highest since March 17. The gauge of hedging costs on the US Oil Fund, the biggest exchange-traded fund tracking WTI, advanced 40 per cent in August, the most since October.

BLOOMBERG