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Oil prices struggle on doubts OPEC can rein in oversupply

16 June 2017

OPEC's plan to cut production and support prices is likely to be undone by increased output in the USA, the International Energy Agency predicted Wednesday.

"Our first outlook for 2018 makes sobering reading for those producers looking to restrain supply", the IEA said in its monthly oil market report.

Top producer Russian Federation, not an OPEC member but participating in the deal, is expected to export 61.2 million tonnes of oil via pipelines in the third quarter (around 5 million bpd), against 60.5 million tonnes in the second quarter, according to industry sources and Reuters calculations.

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The Organisation of Petroleum Exporting Countries (OPEC) on Tuesday said it would achieve the re-balancing of the crude oil market at a "slower pace", stressing that even its own output in May jumped as a result of increased production by Nigeria, and Libya, which were exempted by the agreement to reduce production.

U.S. West Texas Intermediate crude futures fell almost 4 percent, plunging to a five-week low below $45 a barrel, following the report. Motor-fuel stockpiles expanded by 2.1 million barrels last week, the Energy Information Administration reported.

Both crude oil benchmarks have lost all the gains made at the end of previous year after the oil cartel agreed with other big producers to cut output in an effort to prop up prices.

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Supply from 11 OPEC members with production targets under the accord - all except Libya and Nigeria - averaged 29.729 million bpd last month, according to figures from secondary sources that OPEC uses to monitor output. "OPEC should rethink its strategy of trying to verbally and artificially drive oil prices higher, because the result of that strategy is very resilient USA production". In short, whenever oil demand rises and prices go up, it will be met by increased supply from the US.

It reported that United States crude oil inventories fell by 1.7 MMbbls (million barrels) to 511.5 MMbbls on June 2-9, 2017.

With supplies plentiful, strong demand is needed to drive the market, but there are signs of a slowdown. Additionally, the EIA reports that the largest global increase for crude oil will occur in quarter two of 2018, due to OPEC and Brazilian-driven production are on the rise. As a result, the need for crude from Opec won't be high enough for the group to reverse cuts it's now making to drain a global glut.

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OPEC and non-OPEC countries made a decision to extend oil output cuts for nine months in Vienna on May 25.