Oil prices drop Wednesday over concerns that OPEC would not be able to maintain its high compliance so far with output cuts aimed at reining in a global fuel supply overhang.
Brent crude futures were trading at $55.80 per barrel at 0115 GMT, down 17 cents from their last close.
U.S. West Texas Intermediate (WTI) crude futures, were down 20 cents at $53 per barrel.
OPEC (The Organization of the Petroleum Exporting Countries) and other producers like Russia have agreed to cut output by almost 1.8 million bpd (barrels per day) during the first half of this year.
According to BMI Research, based on a calculated compliance of 92.8 percent by OPEC with its planned production cuts, production was down 1.08 million bpd from the agreed upon reference levels.
But, it warned that a much lower compliance rate of just 40 percent by Iraq, OPEC’s second biggest producer, “could prove problematic to group cohesion” as other members of the producer club will have to go beyond their targets in order to meet the overall target of 1.2 million bpd in the first half of 2017.
Some traders believe upcoming oil field maintenance across the Middle East may help OPEC achieve production cuts.
But overall, analysts said that oil markets remain well supplied despite OPEC’s cuts. This is partially due to a 6.5 percent rise in U.S oil production since mid-2016 to 8.98 million bpd.
U.S. bank Citi said that it was lowering its 2Q 2018 and 4Q 2018 oil price forecasts by $1 a barrel.
“Our ICE Brent forecasts for 2Q’18 will now be $63 per barrel and for 4Q’18 will be $58 per barrel to give a calendar average of $60 per barrel,” it said.
Aside from physical oil markets, a rising correlation between crude futures and the U.S-dollar has caught market attention.
Oil prices and the U.S-dollar are usually in an inverse correlation since a strong greenback weighs on crude as it makes fuel purchases more expensive, potentially crimping demand. A weaker dollar supports oil as it makes fuel imports cheaper.
Thomas Reuters Eikon data shows that the price link between Brent and the dollar is now at its highest since 2005.
This has come as oil was lifted by the production cuts, while the dollar received support from rising interest rates.
If a strong dollar and rising oil prices continue, traders say that could lead to higher inflation.
Article written by HEI contributor Lydia Ezeakor.