Oil slips as rising U.S. output offsets OPEC-led cuts

By Christopher Johnson

LONDON (Reuters) - Oil prices slipped on Tuesday as rising U.S. drilling activity undermined efforts by OPEC and other producers to cut output in a move to prop up the market.

Brent crude oil was down 20 cents a barrel at $55.03 by 0900 GMT. U.S. light crude was down 30 cents a barrel at $52.33.

Both benchmarks have traded within fairly narrow ranges over the last two months, since the Organization of the Petroleum Exporting Countries agreed to cut output by almost 1.8 barrel per day (bpd) in an attempt to clear a global glut.

After an initial price rise on hopes that markets would rebalance quickly, Brent and U.S. crude futures have both been held back by evidence of higher U.S. oil drilling and forecasts of a rebound in shale production.

 

Support from OPEC cuts and pressure from shale are still dominating the global oil market, keeping Brent close to $55 a barrel and U.S. crude not far from $52.50.

"OPEC adherence to production targets has been strong," said U.S. investment bank Jefferies, but added that U.S. drilling "activity levels are already picking up".

As a result, Jefferies said it was "not inclined to change our Brent price forecast - $57.75 per barrel in 2017, $71.75 per barrel in 2018".

Following months of increased drilling, U.S. oil production has risen by 6.3 percent since July last year to almost 9 million bpd, according to data from the U.S. Energy Information Administration.

Goldman Sachs estimates that year-on-year U.S. oil "production will rise by 290,000 bpd in 2017" if a backlog on rigs that are still to become operational is accounted for.

The differing outlook between global oil markets and the U.S. market has focused attention on the spread between Brent and U.S. crude oil futures, also known as West Texas Intermediate or WTI.

Brent's premium over U.S. crude for March is now around $2.70 a barrel, reflecting a tighter market as OPEC's cuts bite and a more over-supplied U.S. as drilling increases.

The spread was closer to $1 a barrel in November, before OPEC agreed to cut production.

"Brent is supported by OPEC cuts, (but) WTI falls due to rising U.S. output," Commerzbank commodities analyst Carsten Fritsch told the Reuters Global Oil Forum.

(Additional reporting by Henning Gloystein in Singapore; Editing by Mark Potter)