Oil prices fell on Tuesday as rising U.S. drilling activity offset efforts by OPEC and other producers to cut output in a move to prop up the market. Brent crude futures, the international benchmark for oil prices, were trading at $55.10 per barrel at 0516 GMT, down 13 cents from their last close. Since their January peak, Brent has lost over 5.6 percent in value.
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U.S. West Texas Intermediate (WTI) futures were at $52.41 a barrel, down 22 cents from their previous settlement, and WTI is down almost 3 percent since its January peak. The falls reflect a sentiment that efforts led by the Organization of the Petroleum Exporting Countries (OPEC) to cut output by almost 1.8 barrel per day (bpd) in order to end overproduction were not big enough to offset rising U.S. drilling.
U.S. investment bank Jefferies said that while “OPEC adherence to production targets has been strong”, growth in U.S. shale oil production was undermining OPEC’s efforts to balance global oil markets by bringing production levels in line with consumption. “Higher prices will inevitably lead to growth in U.S. production, and activity levels are already picking up,” Jefferies said.
As a result, the bank said it is “not inclined to change our Brent price forecast – $57.75 per barrel in 2017, $71.75 per barrel in 2018”. Following months of increased drilling, U.S. oil production <C-OUT-T-EIA> has risen by 6.3 percent since July last year to almost 9 million bpd, according to data from the U.S. Energy Information Administration.
Goldman Sachs estimates that year-on-year U.S. oil “production will rise by 290,000 bpd in 2017” if a backlog on rigs that are still to become operational is accounted for. With the differing outlook between global oil markets and that in the United States, traders said a renewed focus on the spread between Brent and WTI futures has emerged.
The Brent premium over WTI for March delivery is currently over $2.7 per barrel, reflecting a tighter global market as OPEC’s cuts bite and a more over-supplied U.S. as drilling continues to rise. Yet by November this year, this Brent premium is down to just over $1 a barrel. “You’ve already seen U.S. crude coming into Asia and Europe, as traders take advantage of arbitrage between the U.S. and the rest of the world,” one crude trader in Singapore said. “But at some stage, that exported U.S. crude will get priced into the global market and out of the American one, bringing down the spread between Brent and WTI.”