Oil lower ahead of OPEC meeting, dollar supports

SINGAPORE: Brent dropped below $116 on Wednesday ahead of an OPEC meeting where members are expected to agree to raise global oil supplies to rein in high prices that have weighed on growth and stoked inflation in the United States, Europe and Asia.

Dollar weakness limited the fall after US Federal Reserve Chairman Ben Bernanke said growth in the world's largest economy had slowed.

Brent crude dropped 95 cents to $115.83 a barrel by 0333 GMT, erasing some of the gains from the previous session. US crude eased 46 cents to $98.63 a barrel.

Regardless of OPEC's decision, top oil exporter Saudi Arabia plans to pump another 500,000 barrels a day this month to reach at least 9.5 million bpd, its highest output for three years, a senior Gulf industry official familiar with Saudi oil policy told Reuters.

The kingdom, the biggest producer in OPEC, wants OPEC to lift formal output limits for the first time since 2007 to show consumer countries that it recognises the danger to the economy from energy inflation.

Saudi and its Gulf Arab allies want OPEC to at least close the 1.4 million barrel per day gap between the producer group's two-and-a-half year old official production target of 24.8 million bpd and actual output, estimated by OPEC in April at 26.2 million.

"We think that the likely OPEC announcement of a 1.5 million bpd increase in production quotas will offer moderate pressure to trade initially but also think that it has already been priced in," said Tom Pawlicki, analyst at MF Global Research.

Riyadh hopes its extra supplies will put an end to oil's sharp rally, driven by strong demand growth, Arab unrest and a weakening dollar.

The dollar edged up from a one-month low against a basket of major currencies, but was under pressure on Bernanke's comments and after a senior Chinese currency regulator warned of the risk of excessive dollar holdings.

"These (oil) prices are being driven by the US dollar," said Jonathan Barratt, managing director of Commodity Broking Services. "The weak dollar-long commodity trade is entrenched regardless of what the fundamentals are."

US crude stocks slipped 5.5 million barrels in the week ended June 3, data from the American Petroleum Institute showed on Tuesday, far exceeding the average analyst forecast for a drop of 300,000 barrels.

The US Energy Information Administration will issue its weekly inventory data later on Wednesday.

Analysts expected US crude oil inventories to have fallen 300,000 barrels last week, while gasoline stocks climbed 1 million barrels, according to a Reuters poll.

The US government raised its world oil demand forecast for 2011 on expectations Japan and other countries will need more crude to generate electricity, a surprise move that adds pressure on OPEC to boost production.

Copyright Reuters, 2011