Oil falls on doubts output cut will end global glut

December 7, 2016 10:12 AM

Oil prices slipped on Wednesday on doubts production cuts promised by OPEC and Russia would be deep enough to end a supply overhang that has weighed on markets for more than two years.

North Sea Brent crude was down 65 cents a barrel at $53.28 by 1430 GMT. U.S. light crude was down 70 cents at $50.23 a barrel.

Oil prices surged almost 20 percent after the Organization of the Petroleum Exporting Countries and Russia announced last week that they would cut production next year in an effort to prop up markets.

But doubts have emerged over whether the planned cuts will be enough to rebalance the market.

Since the deal was announced, OPEC and Russia have reported record production and output elsewhere is also resilient.

The U.S. Energy Information Administration said on Tuesday it expected domestic crude oil production for 2016 and 2017 to fall by less than previously expected.

"Investors are torn between hopes that producers will cut enough production to balance supply and demand, and fears that they won't," said Tamas Varga, senior analyst at London brokerage PVM Oil Associates.

OPEC and non-OPEC oil producers meet this weekend in Vienna to agree details of the output cut, which targets an overall reduction of around 1.5 million barrels per day (bpd).

OPEC member Nigeria, exempt from the cuts, said on Wednesday it hoped to boost its oil production to 2.1 million bpd in January, up from 1.9 million bpd now.

"We will see whether belief in the (OPEC production) deal will hold," said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt. "There is a big discrepancy right now between expectations, perception and reality."

Despite widespread scepticism, many analysts say 2017 will likely see a more balanced oil market.

"Oil markets are on track to tighten over 2017, which will be accelerated by OPEC's decision to reduce production alongside non-OPEC countries," said BMI Research. "If effectively implemented, we expect the global oil market will return to balance in Q1 2017."

Oil production has been outpacing consumption by 1 to 2 million barrels per day since late 2014.

"The average annual oil price will be higher in 2017 than in 2016, with Brent at $55 per barrel for the year," BMI Research said. The average 2016 Brent price has so far been $44.47 per barrel.

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