Published: Tue, March 21, 2017
Business | By Megan Pierce

Oil Prices Drop Amid Record High US Supplies, Hurting OPEC's Efforts

Russian Federation and 10 other non-OPEC producers agreed to cut half as much.

The deal has lifted oil prices, but inventories in industrial nations are rising and higher returns have encouraged US companies to pump more. Meanwhile, given that Libya and Nigeria are exempt from cuts, a rebound in their production will increase Opec output even if other members stick to their quotas.

There is also disparity between official Opec supply data and secondary source data which makes it hard to gauge the extent of supply cuts.

The broader macro backdrop has proved helpful for gold, as demand for the metal from the jewellery industry has been lackluster, hitting a seven-year low, according to the World Gold Council.

This extended a recovery that is expected to boost shale production by the most in six-months in April.

The Opec and some non-Opec producers cut production from January 1 to reduce record stocks of crude.

"The uptick in arbitrage has not gone unnoticed by the large Middle Eastern (Opec) producers", analysts from consultancy JBC Energy said in a note to clients last week.

"Hard negotiations are on the way", another one of the sources said.

"Although OPEC's inability to balance the oil markets in the first half of 2017 has sparked speculations of the organization extending its six-month contract, the rise of USA shale and lingering concerns of some members not fully following the compliance in cutting production could create headwinds".

Reacting to the ongoing glut in markets, financial oil traders cut their net-long US crude futures and options positions in the week to last Tuesday, the third consecutive reduction, the US Commodity Futures Trading Commission (CFTC) said.

The IEA was slightly more bullish in its forecast as it projects the market to attain a deficit in H1 unlike Opec which expects that to happen in the second half of this year.

"This is a strong sign that Saudi Arabia is committed to rebalancing the market", said Mohamed Ramady, a London-based independent analyst. At the end of a year ago, they agreed to reduce production to ensure prices would go up.

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