Oil prices drop by 1.3%

Oil prices dropped by 1.3 percent yesterday after a short-lived boost from Saudi Arabia voicing confidence that a major international deal to cut production has started to drain the market of excess supply.

On the New York Mercantile Exchange, crude futures for delivery in March   traded at $52.54 a barrel, down 68 cents, or 1.3%, in the Globex electronic session, while  March Brent  fell 56 cents, or 1%, to $54.93 a barrel.

Oil prices had gained traction over the weekend after Saudi Arabia’s energy minister, Khalid al-Falih, said the 20 nations that have agreed to rein in output are showing “very good compliance.”

According to officials, the Organization of the Petroleum Exporting Countries (OPEC) and 11 non-OPEC producers have already cut 1.5 million barrels a day from the global oil market — over 80 percent of the amount pledged.

While the cuts apparently have been implemented, the reduction had been “largely priced in,” said Commerzbank analysts in a note yesterday, as they reflected on oil starting the week in the red.

The latest figure only reflects the amount cut by participating nations and doesn’t count OPEC members who didn’t join the deal. Libya, for example, was exempt because its oil industry has been marred by months-long civil unrest. The state-owned oil company recently reported that production has risen above 700,000-barrels a day for the first time in three years.

Official OPEC January production data is expected to be be released in mid-February. Other analysts said that if producers continue to adhere to the production limit, the oil market may encounter a supply shortage later this year, pushing Brent prices to the $60 a barrel range, despite expected slower growth in global demand. The world’s energy watchdog, the International Energy Agency, now forecasts growth in global oil demand to ease to 1.3 million barrels a day this year, from 1.5 million barrels a day in 2016.

“The prospect of higher product prices assuming that the cost of crude oil rises in 2017, plus the possibility of a stronger U.S. dollar, are factors behind our reduced demand growth outlook for this year,” the agency said in its monthly report. Another potential threat to OPEC’s plan is intensifying oil-digging activities in the U.S. The more oil the U.S. produces, the less it will need from the Middle East. Data from industry group Baker Hughes shows the number of working oil rigs in the U.S. climbed by 29 in the week ended Jan. 20 to a total of 551. The oil rig count stands at its highest level in 14 months, according to Price Futures Group’s Phil Flynn.

“Assuming the U.S. oil rig count stays at the current level, we estimate U.S. oil production would increase by 315,000 barrels a day between fourth quarter 2016 and fourth quarter 2017 across the Permian, Eagle Ford, Bakken and Niobrara Shale plays,” Goldman Sachs said.