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Oil falls as US drilling offsets talk of an Opec-led cut extension
[SINGAPORE] Oil prices fell on Monday as rising US drilling activity outweighed talks that an Opec-led production cut initially due to end in mid-2017 may be extended.
Benchmark Brent crude futures eased 22 cents, or 0.4 per cent, from their last close to US$50.58 per barrel by 0527 GMT.
In the United States, West Texas Intermediate (WTI) crude futures were down 32 cents, or 0.7 per cent, at US$47.65 a barrel.
Traders said that prices received some support from talks over the weekend between the Organization of the Petroleum Exporting Countries (Opec) and other producers aimed at extending a production cut beyond the middle of the year in order to prop up the market.
"Opec and non-Opec decided to get ahead of the game this weekend, announcing they are reviewing whether the output curb deal should be extended," said Jeffrey Halley of futures brokerage Oanda in Singapore, adding that this had given crude some support.
But any Opec-led cuts have been offset by rising drilling activity and oil production in the United States, which traders said contributed to financial traders reducing their long positions in crude futures to the lowest level since early December. "The US oil rig count continued its surge ... Since its trough on May 27, 2016, producers have added 336 oil rigs (+106 per cent) in the US," Goldman Sachs said in a note.
Since mid-2016, US oil production has risen by 700,000 bpd, or 8.3 per cent, to 9.13 million bpd, government data shows.
The US bank said that should the rig count stay at current levels and the impact of previously closed rigs returning to production was considered, then US oil production would rise by 235,000 bpd between the fourth quarter of 2016 and the first half of 2017.
Because of soaring US output and the cuts by Opec, the discount of US WTI crude prices to international Brent crude has grown to over US$2.90 per barrel, heading for its widest close since late 2015, encouraging more sales of US oil to Asia to replace cuts in Middle East production.
Despite the ongoing fuel supply overhang and rising US shale output, Goldman Sachs said that global oil markets were slowly rebalancing, largely due to strong demand growth.
"While the shale production rebound has surprised to the upside, it will be offset in our view by the high compliance to the production cuts through 1H17 and most importantly, strong demand levels," the bank said. "We believe that the rebalancing of the oil market is in fact making progress," it said, adding that an Opec-led extension of the production cut was therefore not needed.