Oil: High inventories undermine Opec

Oil prices fell by a dollar on Tuesday as high stock levels undermined the impact of an expected crude production cut by Opec.

US light crude for November delivery CLX6 settled down US$1.01 to US$58.93 per barrel, reversing a US$1.37 rally on Monday. Brent crude LCOc1 lost 72 cents to US$60.94 a barrel.

Prices have recovered slightly from last Thursday's low of US$57.22, driven by expectations the Organisation of Petroleum Exporting Countries will agree to an output cut to prevent prices from sliding further.

US oil has fallen from record mid-July highs above US$78 a barrel, weighed down by healthy global inventory levels.

"The Opec cut and winter fears are limiting the downside but at the same time, the upside is limited by the high crude inventories in the United States," said Tony Nunan, a risk manager with Japan's Mitsubishi Corp.

"In the short term, the market is going to find it hard to go up and equally hard to go down."

A forecast of a relatively cold winter in the United States also provided some support on Tuesday, pushing US crude to a session high of US$60.54 before selling set in.

Private weather forecaster EarthSat Energy WeatherWinter predicted this year's winter in the United States would be 5 per cent colder than last year's unusually mild season, potentially increasing demand for heating oil and natural gas.

But it would still be warmer than the 30-year norm.

DIVISION OVER QUOTAS

Opec ministers, who meet on Thursday in Qatar, agree on the need to trim output by 1 million barrels per day (bpd) to support prices. But they disagree on whether to cut the output from actual production of roughly 27.5 million bpd or from their nominal 28 million bpd ceiling.

Analysts say that even with an output reduction, the market could remain well-supplied and Opec's slowness to act has cost it credibility. Cartel members have been talking about cuts since late September, but have yet to finalize a deal.

In a report on Monday, Opec said it was cutting its forecast for demand for its oil in the fourth quarter and that price weakness might persist, prompting some speculation it might cut output more deeply than previously expected.

"This strong statement may have led the market to conclude the cartel was looking beyond this week's cut and possibly toward a second one, perhaps imposed in December," Edward Meir wrote in the Man Energy Daily Report.

But he said he still thought Opec was "behind the curve" in adjusting production and that any cut this week might not do much to support prices.

Gold traders have been keenly following oil price movements in recent sessions and said this week's Opec meeting could have an effect on the gold market as well as on oil prices.

"If investors want to play the oil market, they buy and sell gold as a kind of by-product as well," said trader Alexander Zumpfe of Germany's Heraeus.

Markets are eyeing weekly US inventory date to be released on Wednesday for further direction.

A preliminary Reuters survey predicted a 1.1 million barrel rise in US crude inventories.

Distillate stocks, including heating oil, were expected to ease by 500,000 barrels, while petrol stocks were seen falling by 100,000 barrels.

- REUTERS