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Oil drops to US$65 on US shale outlook, dollar

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Oil fell to around US$65 a barrel on Tuesday, pressured by the possibility that US shale oil producers could increase drilling activity and by a stronger dollar.

[LONDON] Oil fell to around US$65 a barrel on Tuesday, pressured by the possibility that US shale oil producers could increase drilling activity and by a stronger dollar.

The dollar could rally further, Morgan Stanley said, adding to a growing list of headwinds crude faces that include rising Opec supply. Goldman Sachs said oil prices were at a level that would spur US producers to boost activity.

Brent crude was down 54 cents at US$64.98 a barrel at 0828 GMT, while US crude, also known as WTI, was 36 cents lower at US$59.36. "We believe that should West Texas Intermediate prices remain near US$60 a barrel, US producers will ramp up activity, given improved returns," Goldman said in a report.

That would lessen the prospect of a tighter oil market in coming months, one of the factors that have helped Brent rise from a near six-year low close to US$45 in January.

A stronger dollar makes dollar-priced commodities more expensive for buyers using other currencies, and tends to weigh on oil prices. The dollar hit a one-month high against a basket of major currencies on Tuesday. "The USD downward correction is complete," Morgan Stanley said in a report. "A stronger dollar would only reinforce our near-term concerns for oil prices, especially Brent." Brent collapsed from US$115 in June 2014 due to ample supplies in a decline that deepened after Opec last November dropped its policy of cutting output to support prices, in a bid to slow higher-cost competing supply sources such as US shale.

Taking turns in dominating sentiment since then are concerns about ample supplies currently and the prospect of a tighter market ahead as supply growth from higher-cost producers slows.

The Organization of the Petroleum Exporting Countries gathers on June 5. On Sunday, Iran said Opec was unlikely to change its production ceiling at the meeting.

REUTERS