Oil edges up as planned oil production cuts start to materialise

By Henning Gloystein

SINGAPORE (Reuters) - Oil prices edged up on Friday as evidence increased that producers in the Middle East were informing customers of upcoming supply cuts as part of a coordinated effort to drain a global glut.

Brent crude futures were trading at $54.11 per barrel at 0729 GMT, up 9 cents from their last settlement.

U.S. West Texas Intermediate (WTI) crude was up 18 cents at $51.08 per barrel.

Oil producers including Kuwait, Saudi Arabia, and Abu Dhabi, who are key members of the Organization of the Petroleum Exporting Countries (OPEC), have started notifying customers that they would cut supplies from January as part of an effort by OPEC and other producers led by Russia to rein in a global fuel supply overhang and prop up prices.

 

"These greater projected cuts and our strong demand growth forecast lead us to forecast a normalisation in inventories and backwardation across the forward curve by next summer," Goldman Sachs said on Friday. 'Backwardation' refers to trading where oil for future delivery is cheaper than that for imminent delivery.

Under the output cut deal, production will fall by almost 1.8 million barrels per day (bpd) in a bit to reduce a fuel supply overhang that has dogged markets for over two years.

Goldman said that it expected 84 percent compliance to the planned cuts.

As a result, the U.S. bank said it was raising its WTI price forecast to $57.5 per barrel from $55 per barrel previously for the second quarter of 2017.

For Brent, Goldman expects prices between $55 and $60 per barrel after the first half of 2017.

There were, however, some ongoing doubts about the willingness of other OPEC members to comply.

Iraq, the group's second biggest producer after Saudi Arabia, has signed new deals that will increase its sales to Asian customers like China and India despite its commitment to reduce output by 210,000 bpd.

Still, analysts at U.S. investment bank Jefferies said that the fact that OPEC and non-OPEC producers had come to an agreement would provide oil prices with a floor.

"The decision by a group of 11 non-OPEC producers to join OPEC in production cuts has likely put a floor on Brent oil prices in the low $50s until such time as adherence to the cuts can be assessed," Jefferies said in a note to clients.

Despite the possible price floor, Goldman said there was also limited room for market upside prior to 2017's cuts.

"The oil market has digested the OPEC and non-OPEC cut announcements and focus is shifting to the current lacklustre fundamentals...We expect that the potential ramp-up in Libya and a stronger dollar will likely further limit the near-term upside to prices and our December WTI price forecast remains $50 per barrel."

(Reporting by Henning Gloystein; Editing by Simon Cameron-Moore and Kenneth Maxwell)