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Oil dips over doubts that high Opec compliance with announced cuts will last

Wednesday, February 15, 2017 - 09:38

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Oil prices dipped on Wednesday over concerns that producer club Opec would not be able to maintain its high compliance so far with output cuts aimed at reining in a global fuel supply overhang.

[SINGAPORE] Oil prices dipped on Wednesday over concerns that producer club Opec would not be able to maintain its high compliance so far with output cuts aimed at reining in a global fuel supply overhang.

Brent crude futures were trading at US$55.80 per barrel at 0115 GMT, down 17 US cents from their last close.

US West Texas Intermediate (WTI) crude futures, were down 20 US cents at US$53 per barrel.

The Organization of the Petroleum Exporting Countries (Opec) and other producers including Russia have agreed to cut output by almost 1.8 million barrels per day (bpd) during the first half of 2017.

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BMI Research said that, based on a calculated compliance of 92.8 per cent by Opec with its planned production cuts, production was down 1.08 million bpd from the agreed upon reference levels.

But it warned that a much lower compliance rate of just 40 per cent by Iraq, Opec's second biggest producer, "could prove problematic to group cohesion" as other members of the producer club will have to go beyond their targets in order to meet the overall target of 1.2 million bpd in the first half of 2017.

Some traders said upcoming oil field maintenance across the Middle East might help the group achieve production cuts.

Yet overall, analysts said that oil markets remain well supplied despite the Opec-led cuts, thanks in part due to a 6.5 per cent rise in US oil production since mid-2016 to 8.98 million bpd.

US bank Citi said that it was lowering its Q2 2018 and Q4 2018 oil price forecasts by US$1 a barrel.

"Our ICE Brent forecasts for Q2'18 will now be US$63 per barrel and for Q4'18 will be US$58 per barrel to give a calendar average of US$60 per barrel," it said.

Outside physical oil markets, a rising correlation between crude futures and the US-dollar has caught market attention.

Oil prices and the US dollar are typically in a so-called inverse correlation, since a strong greenback weighs on crude as it makes fuel purchases more expensive, potentially crimping demand. A weaker US dollar supports oil as it makes fuel imports cheaper.

Yet that inverse correlation has been upended, and the price link between Brent and the US dollar is now at its highest since 2005, Thomson Reuters Eikon data shows.

This has come as oil was lifted by the production cuts, while the US dollar received support from rising interest rates.

Should a strong US dollar and rising oil prices persist, traders say that would be a driver for higher inflation.

REUTERS

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