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Oil slips as more US drilling revives glut concerns

Tuesday, January 31, 2017 - 06:35

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Oil prices fell on Monday as news of another weekly increase in US drilling activity had oil forecasters concerned that production cuts from other producing nations may not reduce the global supply glut as much as had been hoped.

[NEW YORK] Oil prices fell on Monday as news of another weekly increase in US drilling activity had oil forecasters concerned that production cuts from other producing nations may not reduce the global supply glut as much as had been hoped.

Global benchmark Brent crude oil prices settled down 29 US cents at US$55.23 a barrel, while US crude futures settled down 54 US cents at US$52.63.

The number of active US oil rigs rose last week to the highest level since Nov 2015, according to Baker Hughes data, with drillers encouraged by oil prices above US$50 a barrel.

The Organization of the Petroleum Exporting Countries and other producers including Russia agreed to cut output by almost 1.8 million barrels per day (bpd) in the first half of 2017 to relieve a two-year supply overhang.

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First indications of compliance to that deal show members have cut production by 900,000 barrels per day (bpd) in January, according to Petro-Logistics, which tracks Opec supply.

Reuters' most recent survey indicated that Opec production declined slightly in December.

The data from Petro-Logistics suggests only 75 per cent of the targeted cuts would be met, said Tony Headrick, energy analyst at CHS in Minnesota.

"There's an apprehension about how big that cutback is going to be versus the strength in US crude production," Mr Headrick said.

"That gap is a little narrower than folks had anticipated more recently."

As a result, oil may have enough support to stay just above US$50 a barrel but not get much higher than that, said Carl Larry, director of business development for oil and gas at Frost & Sullivan.

The cuts have encouraged drillers in low-cost US shale producing regions to ramp up activity, which will temper any price gains, Mr Larry said.

The oil market also declined as downward pressure weighed on global markets facing uncertainty after sweeping US regulatory changes.

"As we see weakness in the equities, it's carrying over into other sectors like energy and even the grain markets," said Phillip Streible, senior market strategist at RJO Futures in Chicago.

"The dollar index was also quite strong all day, which also weighs on prices."

Analysts at JP Morgan said they saw a rise in oil prices beyond US$60 a barrel in 2018 as unlikely.

"For prices to be supported above US$60/bbl in 2018 would likely require continued Opec output reductions that continue to tighten the market beyond Q3 2017 - something that looks unlikely at this juncture," they said in a report to clients.

REUTERS

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