Oil rally driven by sentiment, not demand, OPEC says

VIENNA (Bloomberg) -- Oil’s rally is driven by improving sentiment about the global economy and isn’t supported by crude demand, OPEC Secretary-General Abdalla El-Badri said a day after the group decided to leave production targets unchanged.

Global crude stockpiles remain very high, El-Badri told reporters at a briefing in Vienna. Still, prices may reach $70 to $75 a barrel by the end of the year, partly because speculators are returning to commodity markets, he said.

“There is a bullish sentiment,” El-Badri said. “When we look at fundamentals there is not much support, except for what we have seen in the economies of Asia.”

The Organization of Petroleum Exporting Countries, which supplies 40 percent of the world’s oil, held quotas steady at a meeting on Thursday. Crude futures have surged 29 percent in May, headed for their biggest monthly gain since 1999.

El-Badri urged members to improve compliance with existing oil production quotas to bring down global crude stockpiles. OPEC members are complying with 79 percent of agreed production cuts, he added.

Oil futures, set for their biggest month gain since 1999, gained as much as 93 cents, or 1.4 percent, to $66.01 a barrel on the New York Mercantile Exchange on Friday.

---------------Speculators return

“Speculation is coming back, not only in oil but in all commodities,” El-Badri said. “We see that they are coming back slowly. We don’t want to see them again but we can’t eliminate them.”

Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures in the week ended May 19, according to U.S. Commodity Futures Trading Commission data.

OPEC’s policy of draining global crude stockpiles is being undermined by rising production from countries outside the group, the secretary-general said.

“None of them reduced their production, all of them increased production with the exception of Mexico,” El-Badri said. “They did not really give any hand to the oil market.”

Oil demand would need to recover and stockpiles drop before OPEC could consider raising production quotas again, he said.

Crude inventories in the industrial economies of the Organization for Economic Cooperation and Development are at their highest since 1993, according to the International Energy Agency. Stocks were equivalent to 62 days of consumption as of the first quarter of the year, the IEA said in its monthly oil report May 14.

Those supplies would have to drop to the equivalent of 52 days for OPEC to consider boosting output, El-Badri said.

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