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Tuesday, 10-October-2006
(Bloomberg) -- - Crude oil fell below $59 a barrel in New York after Saudi Arabia's state oil company told customers in East Asia and Europe to expect the same quantity of oil in November as this month, undercutting OPEC's plans to cut output.

Saudi Arabia, the largest oil exporter, notified refiners in Japan, India, Taiwan and South Korea that they will get the full volume of oil called for in annual contracts, refinery officials and traders said. Buyers in Europe will get the same as last month. OPEC President Edmund Daukoru sent a letter on Oct. 8 calling for a 1 million barrel a day cut starting Nov. 1.

``History shows that OPEC deals only work when the Saudis are on board,'' said Bill O'Grady, an analyst with A.G. Edwards & Sons in St. Louis. ``Allocating the cuts is always the problem. The poor countries want the rich ones to take the hit and the rich ones will only do that if a cut is in their best interest.''

Crude oil for November delivery fell $1.28, or 2.1 percent, to $58.68 a barrel at 11:47 a.m. on the New York Mercantile Exchange. Prices are down 25 percent from the record of $78.40 reached July 14 amid concern that fighting in Lebanon between Israel and the Islamic militia Hezbollah, which is supported by Iran, would spread through the Middle East.

Saudi Aramco sent letters today to notify East Asian customers they will receive the same amount of oil next month under long-term contracts, the 19th month with no change in shipments, according to traders and refinery officials who buy oil from Saudi Arabia and declined to be identified because of confidentiality agreements.

Saudi Contracts

Saudi Aramco sells oil under annual contracts that customers renew each year. Buyers are told each month how much oil they can get the next month so arrangements to ship the cargoes can be made. Buyers in Europe have received 70 percent of their contracted Saudi volumes since early 2005, and that will continue in November.

Saudi Arabia accounts for almost a third of OPEC's output. The country hasn't officially commented on whether it's taking part in any reduction in OPEC's supplies.

``There are a lot of reasons for the Saudis to keep on pumping at the present rate,'' O'Grady said. ``The Saudis will do what is in their best interest both economically and geopolitically. Lower prices will hurt rivals in OPEC such as Iran and Venezuela.''

Separately, Aramco told global major oil companies it would lower November supplies by 5 percent, Reuters said yesterday.

Daukoru's Proposal

Daukoru wrote letters to Organization of Petroleum Exporting Countries ministers on Oct. 8 asking them to join the proposed cutback, said the spokesman, who declined to be identified. If they agree, OPEC would lower its official ceiling on output from the current 28 million barrels a day. Indonesian oil minister Purnomo Yusgiantoro said today he got such a letter.

``The impact of OPEC's recent jawboning has been reduced by the Saudi news,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``It is important to not read too much into this.''

OPEC is trying to turn existing ``voluntary'' cutbacks by several members into a group-wide, formal accord. Kuwaiti Oil Minister Sheikh Ali-Jarrah al-Sabah said yesterday ``everyone is in agreement for a cut.''

So far, Nigeria and Venezuela have announced ``voluntary'' cutbacks totaling a combined 170,000 barrels a day. Four other countries, Saudi Arabia, Kuwait, Libya and Algeria, have also agreed to informal cutbacks, Daukoru's spokesman said on Oct. 8, without giving further details.

Reduced Forecasts

Merrill Lynch & Co., the world's third-largest securities firm by market value, lowered its forecast for New York-traded oil for the fourth quarter on high inventories and weak demand, Francisco Blanch, senior oil strategist, wrote today in an e- mailed report.

The average price of West Texas Intermediate, the U.S. benchmark, will fall to $61 a barrel in the fourth quarter from $67 a barrel on concern about ``very high'' inventories and the possibility of a warmer-than-normal winter, Blanch said. ``We've been bearish for the past three or four months on the basis of growing'' fuel surplus.

U.S. crude oil supplies probably rose 1.5 million barrels in the week ended Oct. 6, according to the median of forecasts by 12 analysts before an Energy Department report this week.

Brent crude oil for November fell $1.24, or 2.1 percent, to $59.50 a barrel on the London-based ICE Futures exchange. Brent touched $57.70 on Oct. 4, the lowest since Dec. 30.

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