Oil falls over concerns high OPEC compliance with agreed cuts will last

Oil prices dipped on Wednesday over concerns that OPEC producers would not be able to maintain their high compliance so far with output cuts aimed at reining in a global fuel supply overhang.

Brent crude was trading at $55.62 per barrel at 600 GMT, down 35 cents, or 0.63 percent, from its last close.

U.S. West Texas Intermediate (WTI) crude was down 37 cents, or 0.73 percent, at $52.83 per barrel.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia agreed in December to cut output by almost 1.8 million barrels per day (bpd) during the first half of 2017.

BMI Research said that, based on an estimated compliance with planned production cuts of 92.8 percent by OPEC alone, output was down 1.08 million bpd.

But BMI warned that a compliance rate of just 40 percent by Iraq, OPEC’s second-biggest producer, could prove problematic to group cohesion as others will have to go beyond their targets to meet the overall goal for the first half of 2017.

Some traders said upcoming oil field maintenance across the Middle East might help the group achieve production cuts.

Yet overall, analysts said oil markets remain well supplied despite the OPEC-led cuts, in part due to a 6.5 percent rise in U.S. oil output since mid-2016 to 8.98 million bpd.

U.S. bank Citi said that it was lowering its 2Q 2018 and 4Q 2018 oil price forecasts by $1 a barrel.

“Our ICE Brent forecasts for 2Q’18 will now be $63 per barrel and for 4Q’18 will be $58 per barrel to give a calendar average of $60 per barrel,” it said.

Outside physical oil markets, a rising correlation between crude futures and the U.S. dollar has caught market attention.

Oil prices and the dollar are typically in an inverse correlation. A strong greenback weighs on crude as it makes fuel purchases more expensive, potentially crimping demand. A weaker dollar supports oil by making fuel imports cheaper.

That inverse correlation has been recently upended, and the price link between Brent and the dollar is now at its highest since 2005, Thomson Reuters Eikon data shows.

This has come as oil was lifted by the production cuts, while the dollar received support from rising interest rates.

Should a strong dollar and rising oil prices persist, traders said that would be a driver for higher inflation.

In Britain last month, a strong dollar and firm oil prices contributed to the fastest rise in consumer prices since June 2014.

Source: Reuters