Oil drops on doubts that output cut will be deep enough

Oil prices slipped on Wednesday on persistent doubts whether a planned crude production cut led by OPEC and Russia would be deep enough to end a supply overhang that has dogged markets for over two years.

International Brent crude futures were at $53.82 per barrel at 0608 GMT, down 11 cents, or 0.2 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were down 17 cents, or 0.33 percent, at 50.76 per barrel.

Oil prices shot up as much as 19 percent after the Organization of the Petroleum Exporting Countries (OPEC) and Russia last week announced they would jointly cut production next year in an attempt to prop up markets.

However, doubts have since emerged whether the planned cuts will be big enough to end oversupply. Since the deal was announced, both OPEC and Russia have since reported record production.

“With both Russia and OPEC producing at record (levels), the market is scratching its head about how both blocs will manage to comply with the Vienna production cut targets,” said Jeffrey Halley of brokerage OANDA in Singapore.

“The point is valid, as the more OPEC and Russia produce, the higher the starting point will be to have to cut from.”

OPEC and non-OPEC oil producers will meet this weekend in Austria’s capital to agree details of the output cut, which targets an overall reduction of around 1.5 million barrels per day.

“While the OPEC accord had helped rally crude prices towards $55 (for Brent), the commitment of the cartel and the non-OPEC members will be put to test this Saturday when they once again meet in Vienna,” said Mihir Kapadia, chief executive at Sun Global Investments.

Despite the skepticism around implementing the cuts, analysts said 2017 will likely see a more balanced market.

“Oil markets are on track to tighten over 2017, which will be accelerated by OPEC’s decision to reduce production alongside non-OPEC countries,” said BMI Research. “If effectively implemented, we expect the global oil market will return to balance in Q1 2017.”

Oil production has been outpacing consumption by 1 to 2 million barrels per day since late 2014.

But as a result of a more balanced market next year, BMI said that “the average annual oil price will be higher in 2017 than in 2016, with Brent at $55 per barrel for the year”.

The average 2016 Brent price has so far been $44.47 per barrel.

Source: CNBC