The Organization of Petroleum Exporting Countries Thursday boosted its oil demand views for 2011 over fast-improving economic prospects, helping to push oil prices within reach of $90 a barrel.
The Organization of Petroleum Exporting Countries Thursday boosted its oil demand views for 2011 over fast-improving economic prospects, helping to push oil prices within reach of $90 a barrel.

The revised demand assumption, hard on the heels of an upgrade in medium-term forecasts last week, is likely to vindicate the group's relaxing attitude toward rising oil prices and production by its members.

In its November report, OPEC upgraded by 190,000 barrels a day its forecast for world oil demand growth in 2010 to 1.3 million barrels a day. It also adjusted by 120,000 barrels a day its views for consumption growth next year to 1.2 million barrels a day.

Following the news, Brent crude prices in London reached $89.70 a barrel--their highest level in two years--but they had eased to around $88.95 a barrel at 1348 GMT. Light Sweet Crude in New York also spiked to $89.10 a barrel and was trading at $88.45 a barrel at the same time.

But analysts said the rise was also supported by strong oil and industrial production data from China and expectations of continued dollar weakness.

OPEC said the more bullish forecast had been largely inspired by an improved outlook for oil demand in industrialized countries. There, oil consumption has outpaced expectations in the third quarter as it benefited from various stimulus plans.

Underpinning the rosier demand view, OPEC also revised its world economy forecast to 4.1% for 2010. Only last week, the group had upgraded the forecast from 2.1% to 3.9% when it released its annual outlook report.

It said the new economic outlook was supported by a better-than-expected expansion in the manufacturing sector, notably in Germany and India .

OPEC's vote of confidence in the global economy is positive news as the group has a vested interest in downplaying market needs after coming under pressure to produce more oil.

But OPEC is merely catching up with other economic forecasters after being surprised by the strength of recovery.

The International Monetary Fund forecasts global economic growth at 4.8% this year, compared with OPEC's 4.1% forecast.

OPEC's upbeat scenario comes after officials from the organization said $90 a barrel won't hit the recovery. That has subtly broadened their view that $70 to $80 a barrel is the right price for producers and consumers.

Some members say in particular that non U.S.-consumers don't pay as much as the nominal oil price would suggest because the dollar has weakened. Indeed, numbers disclosed in the monthly report suggest the difference between real prices paid for OPEC oil--excluding inflation and currency changes--and nominal ones widened to over $30 a barrel in October from about $27 a barrel in September.

After concluding its October meeting, the organization also refrained calling its members to respect production cuts agreed in 2008 despite increasingly lax respect to the commitments.

OPEC said Thursday that crude production from its 11 quota-bound members, increased by 163,600 barrels a day in October, bringing compliance to agreed cuts to 51.3%.

The figure contrasts with a compliance rate of about 80% early 2009.

However, it maintained a cautious view on growth for 2011, keeping its global economic growth forecasts unchanged at 3.6% "as it is still unclear if the current momentum can be carried over into the coming year."

The producers' group also warned that shrinking contango--the difference between contracts about to expire and those coming to term later--"will likely trigger a release of crude oil from floating storage."

That could potentially put a brake on the current rise on oil prices. Speculators tend to keep inventories high waiting for better prices but sell when they realize they won't be higher in the future. OPEC has always warned that high levels of crude storage could endanger prices by abruptly bringing too much supply on the market.

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