Oil Rally May Falter on Saudi Output Gain, Deutsche, Lehman Say

Sept. 24 (Bloomberg) -- Oil's rally above $80 a barrel may falter by spurring an increase in Saudi Arabia's production to avoid weakening the global economy, Deutsche Bank AG and Lehman Brothers Holdings Inc. said.

Saudi Arabia may start to reverse a 1 million barrels-a-day cut in output since the beginning of the year, Deutsche analysts including Chief Energy Economist Adam Sieminski said. The kingdom will keep adding supply if prices don't drop below $80, Lehman analysts led by Chief Energy Economist Edward Morse said.

The 20 percent jump since Aug. 22 in the U.S. benchmark masks bearish factors that will weigh on prices in coming weeks, Lehman said. Storm risks in the U.S. Gulf may be receding just as pipeline outages that slowed deliveries to the mid-continent end. Apart from higher Saudi output, ``downgrades'' to U.S. and Chinese oil demand growth in 2008 offer the best chance of ``short-circuiting'' the recent rally, Deutsche said.

``Trading exuberance can overwhelm market fundamentals and create temporary false signals about market conditions,'' Lehman's report, dated Sept. 21, said. ``The rally above $80 could be short-lived.''

Crude oil for November delivery fell as much as 96 cents, or 1.2 percent, to $80.66 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $80.90 at 1:01 p.m. in London.

Bears vs Bulls

Predictions that oil will fall by Deutsche and Lehman contrast with recent reports from Goldman Sachs Group Inc. and Merrill Lynch & Co. Crude is more likely to rise to $100 than to drop to $60 a barrel in the ``near term,'' Merrill said today.

Weather-related problems raised the chance oil prices will gain while stockpiles of crude are low, said Francisco Blanch, the head of commodities research at Merrill. A Federal Reserve decision to cut U.S. interest rates is also pushing oil prices higher.

Goldman raised its yearend oil-price forecast to $85 a barrel and said in a note released on Sept. 17 there was a ``high risk'' of a jump above $90 because supplies will drop to critical levels in the fourth quarter, when heating demand peaks. Goldman increased its 2007 yearend forecast from a previous prediction of $72 a barrel. Prices are forecast to reach as high as $95 a barrel by the end of 2008, Goldman said.

`Inventories Shrinking'

Oil inventories held in Organization for Economic Cooperation and Development nations will shrink at a rate of 1.5 million barrels a day next quarter, compared with the seasonal norm of a 0.5 million-barrel-a-day drop, because demand is that much stronger than supply, Goldman said.

Goldman said its average price forecast for 2008 was $85 a barrel with a yearend 2008 target of $95 a barrel.

Lehman, in contrast, expects some 1.5 million barrels a day of additional supply from members of the Organization of Petroleum Exporting Countries and non-OPEC producers to reach global markets at the same time as refinery maintenance curtails 1 million barrels a day of demand, Lehman said.

OPEC could add more production than the 500,000 barrels a day it announced for the fourth quarter after the Sept. 11 meeting, the Lehman report said. Non-OPEC supply from new fields and the end of the North Sea maintenance season will add 1.2 million barrels a day for the rest of the year.

Freight rates will be an early indicator of increased Saudi production, the report, dated Sept. 21, by analysts including Deutsche's Global Head of Commodities Michael Lewis said.

``We are watching to see if TD3 wet freight rates rally as a sign that Saudi Arabia is taking action,'' Deutsche said, referring to the benchmark rate to load 2 million barrels of crude on a very large crude carrier from the Arabian Gulf to Japan, the world's second largest oil importer after the U.S.

``We find that Middle East oil production tended to be loosely correlated with TD3 freight rates, which are currently trading at relatively depressed levels,'' Deutsche said.