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Oil Slips Further Ahead Of OPEC, Fed Meetings

by Amwal Al Ghad English

Crude-oil futures slipped a little in Asia on Tuesday, extending a five-day losing streak, amid cautious tone ahead of Wednesday’s Organization of Petroleum Exporting Nations meeting to decide production quotas and the U.S. central bank’s monetary policy decision.

Oil futures for delivery in January  were down 2 cents at $85.54 a barrel in electronic trading. The contract moved on either side of Monday’s settlement on the New York Mercantile Exchange, when prices fell 37 cents to record a fifth consecutive day of losses.

The moves came as the U.S. dollar inched up ahead of Wednesday’s meeting of the Federal Open Market Committee on monetary policy, where the Fed is expected decide whether to continue its purchases of longer-maturity securities under a policy popularly called Operation Twist.

While Operation Twist, under which the Fed also sells shorter-term securities, expires at the year’s end, the central bank is expected by several analysts to expand its balance sheet to maintain its purchases of bonds with longer maturities.

“Market expectations have the FOMC opting for some additional purchases, and so some further expansion of the Fed balance sheet may already have been discounted by the market,” said Tim Evans, an analyst at Citi Futures.

“That said, there is some potential for a robust expansion in the Fed balance sheet that could weaken the dollar and motivate risk-on trade across a range of commodities, including crude oil,” Evans said.

The ICE dollar index , a measure of the greenback’s performance against a basket of six other major currencies, rose to 80.337 in late morning trade in Hong Kong, up from 80.309 late in North America Monday.

Markets were also looking ahead to Wednesday’s meeting of OPEC, which represents some of the world’s largest oil exporting countries.

Evans said OPEC members could most likely decide to maintain production at the current quota of 30 million barrels per day, and that actual output may remain above that level, “implying an ongoing supply/demand surplus and downward fundamental pressure on prices.”

UBS strategist Julius Walker also said OPEC was “highly unlikely” to change its official production quota.

However, “whatever the group says after the meeting, our balances indicate that OPEC or individual members will need to cut output by [0.5 to 1 million barrels per day] in 2013 in order to prevent growing oversupply in the market and substantial downward pressure on prices. This really represents a challenge to Saudi Arabia, traditionally the swing producer,” he said.

Walker said that while the OPEC’s official production quota has been 30 million barrels a day since December 2011, the group’s actual production in 2012 was an average 31.5 million barrels per day, as it tried to contain oil prices.

Marketwatch

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