Commodities: Opec Meeting’s Big Test For Group’s Strength

The high volatility in markets continues to hurt commodities, with that rush for yield and gains in April gone and seemingly forgotten.

The coming week will be dominated by the rebound in the euro, the weakness in the US economy and the meeting Wednesday of OPEC which could see a small increase in its production quotas.

The cartel hasn't officially changed its production quotas since its decision in December of 2008 (as much of the world plunged into deep recession) to cut production to stop the slide in world oil prices and therefore the income of each member of the group.

At the time, members agreed to reduce actual production by 4.2 million barrels per day, effectively setting the quota for 11 of the cartel's members at 24.845 million barrels a day.

That worked and prices have rebounded to more than $US100 a barrel (from around $US40 a barrel), but now there's growing pressure from the major consuming countries (including China) for more production to help put a lid on inflationary pressures.

Analysts at MF Global said in a note on Friday that they believe energy markets will focus on a June 8 meeting of the OPEC "where mixed signals are being sent as to what the cartel will do".

But before all this, OPEC has to decide who it admits as representatives of Iran and Libya, and both issues could split the group and prevent any decision on quotas.

According to various media reports at the weekend, it remains unclear who will represent Iran, the cartel's second-largest producer, and Libya.

Production in Libya has fallen to a reported 200,000 barrels per day from 2010 daily output of around 1.8 million in the wake of political uprisings meant to oust Moammar Gadhafi.

Libya's country's top oil official Shokri Ghanem last week announced his defection from the Gadhafi regime.

And Iran's government is split with President Mahmoud Ahmadinejad declaring himself Iran's temporary oil minister last month, then appointed a new oil chief on Thursday amid pressure from the nation's parliament, which had claimed that Ahmadinejad's self-appointment was illegal.

The pressure on OPEC for higher production quotas was increased by the International Energy Agency which last week called on oil producers to boost supplies to lessen the pressure on the global economic recovery.

The IEA expressed "serious concern" over growing signs the rise in oil prices since last September is affecting the economic recovery.

It said in its statement that there was a "clear and urgent need for additional supplies on a more competitive basis to be made available to refiners to prevent a further tightening of the market".

Whether OPEC will listen to this plea is very much up in the air because of the uncertainty over membership of Wednesday night's meeting.

The 11 OPEC members bound by quotas pumped an average 26.18 million barrels per day in April, according to a recent survey of OPEC and the oil industry officials.

That's down from the 26.52 million-barrel March estimate, but also more than 1.3 million above the official OPEC target.

So Friday's weakness in world oil prices (despite the fall in the greenback) wasn't much of a surprise.

In New York, Nymex WTI crude futures for July delivery fell 18c, or 0.2%, to $US100.22 a barrel.

For the week oil lost 0.4%.

The Opec queries and the disappointing US jobs overcame the impact of the falling dollar.

The dollar index which measures the US unit against a basket of six currencies fell to 73.775, down from 74.331 before the jobs data and from 74.344 in late North American trading on Thursday.

The euro rose to $1.4626, up from $1.4484 late Thursday. It touched $1.4643, the highest level since early May.

For the week, the euro rose a very solid 2.2%.

The dollar index fell 1.6% from last Friday.

Gold traders weren't so constrained and the week dollar helped prices rise.

Comex August gold rose $US9.70, or 0.6%, to $US1,542.40 an ounce in New York and ended the week up 0.3%.

Comex July silver recovered from big losses at the start of trading to end the day essentially flat.

The contract eased a cent to $US36.19 an ounce.

Silver lost 4.4% on the week, which included the big 4% fall on Thursday.

Comex July copper added 5c, or 1.2%, to $US4.13 a pound.

But over the week, copper lost 1.4%.

Marketwatch said that analysts at Barclays Capital had written that destocking in the supply chain, notably in China, has masked demand strength in copper and weighed on prices.

"Physical indicators in the Chinese market have turned more constructive of late, signalling tightening conditions. We expect the copper market to tighten substantially over the second half, and for prices to hit new highs later in the year," the analysts said.

And New York sugar prices rose to a seven-week high on speculation that the Brazilian crop will not meet previous forecasts.

ICE July sugar futures 0.43c, or 1.8%, to 23.95 USc a pound, the highest since mid April.

Sugar is now up for the last four straight weeks, the longest rally since November.