Oil retreats as Barclays sees possibility of OPEC quota increase

By BEN SHARPLES

SYDNEY (Bloomberg) -- Oil declined amid speculation that the Organization of Petroleum Exporting Countries may increase its production quota when the group meets on Friday.

Futures slid as much as 0.6% in London after rising 0.9% on Tuesday. An increase in OPEC’s collective target would be a formal recognition that current production is above the quota, Barclays Plc said, echoing comments by Morgan Stanley. U.S. crude inventories probably fell for a fifth week, a Bloomberg survey showed before a government report on Wednesday.

Brent’s recovery from a six-year low in January is stalling on speculation a global glut will persist as OPEC members have been pumping above the target of 30 MMbpd for a year. Saudi Arabia defended its strategy of favoring market share over prices after leading a decision by OPEC to maintain the group’s quota at a November meeting.

“We will have to see major concessions from others within OPEC before the Saudis will return to a more cooperative approach,” Michael McCarthy, a chief strategist at CMC Markets in Sydney, said by phone. “It’s pretty clear that the Saudis are asserting their authority within OPEC, with the group appearing to take on U.S. producers. I don’t think we’ll see anything significant out of this meeting.”

Brent for July settlement dropped as much as $0.42 to $65.07 bbl on the London-based ICE Futures Europe exchange and was at $65.08 at 1:42 p.m. Sydney time. It climbed $0.61 to $65.49 on Tuesday. The European benchmark was at a premium of $4.27 to West Texas Intermediate, the U.S. marker grade.

OPEC Quota

WTI for July delivery fell as much as $0.46 to $60.80 bbl in electronic trading on the New York Mercantile Exchange. The contract gained $1.06 to $61.26 on Tuesday, the highest close since Dec. 9. The volume of all futures traded was about 70% below the 100-day average.

While OPEC is expected to leave its allocation unchanged, an increase is possible, Barclays analysts including Michael Cohen said in a June 2 research note. An expansion of the quota would confirm the group’s ambitions to defend market share, according to the bank.

OPEC, which supplies 40% of the world’s crude, pumped 31.58 MMbpd in May, exceeding its target for a 12th month, according to data compiled by Bloomberg. There is some risk of an increase to the quota, Morgan Stanley analysts including Adam Longson said in a Jun. 1 note.

U.S. Supplies

OPEC’s Jun. 5 summit in Vienna comes three weeks before a deadline for a deal on Iran’s nuclear program. The government in Tehran has said it can add almost 1 million barrels to daily production within six months of sanctions being lifted. The nation could boost oil exports by 400,000 bpd in the first months after signing an agreement, according to Bijan Khajehpour, managing partner of Atieh International.

Saudi Oil Minister Ali al-Naimi said on Monday that its market strategy is working as demand is picking up and supply is slowing. OPEC will keep its output target unchanged, according to all but one of 34 analysts and traders surveyed by Bloomberg last month.

In the U.S., crude inventories probably fell by 2.5 million barrels last week, according to a separate Bloomberg survey. They were at 479.4 million barrels through May 22, near the highest level in 85 years, based on monthly records compiled by the Energy Information Administration since 1920. Supplies rose by 1.8 million barrels through May 29, the industry-funded American Petroleum Institute was said to have reported.