Oil Futures Higher Friday

Oil Futures End Mostly Lower

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled flat to down Monday afternoon amid rising domestic crude output and concern over the lack of an enforcement mechanism in overseeing production cuts agreed to last year by the Organization of the Petroleum Exporting Countries and 11 non-OPEC producing countries.

OPEC and non-OPEC producers including Russia held a technical meeting in Vienna on Sunday to design a framework to ensure compliance with the 1.758 million barrels per day (bpd) in production cuts agreed to in deals announced on Nov. 30 and Dec. 10. However, despite assurances that producers were following through on their promises to reduce supply, the market remained skeptical about OPEC's ability to police itself given its checkered history when it comes to compliance with production quotas.

Following Sunday's meeting, OPEC said the committee monitoring compliance would receive reports on whether members are fulfilling their commitments on the 17th of every month and would issue a news release thereafter. There was nothing in the statement discussing punishment for cheaters, which suggests a mechanism to force members to comply with production quotas is not in place.

After the meeting, Saudi Arabian energy minister Khalil al-Falih said there was "very good compliance" by signatories to the OPEC and non-OPEC agreements, adding that producers have already cut output by 1.5 million bpd.

However, analysts note that the 1.5 million bpd figure was 258,000 bpd short of the 1.758 million bpd in total output cuts agreed to late last year. Iraqi so far has cut its output by 180,000 bpd, which is below its commitment to reduce its production by 210,000 bpd, said Jabbar al-Luaibi, the country's oil minister.

Analysts said the bigger worry is that U.S. shale oil producers ramp up output boosted by the OPEC action and higher oil prices that offset the OPEC-led production cuts.

"The price performance suggests that the market has already discounted the production cuts into the price, leaving the market vulnerable to any bearish developments such as Friday's increase in the U.S. crude oil drilling rig count, with recovering U.S. output at least a partial counterbalance to the OPEC reduction in supply," said New York-based Citi Futures analyst Tim Evans.

Others agreed.

"The market today seems to be under pressure because of the rising U.S. rig counts and the market is also disappointed that OPEC didn't come up with a shock-and-awe announcement of further production cuts at the meeting yesterday," said senior analyst Phil Flynn at Price Futures in Chicago on Monday.

According to oil services firm Baker Hughes Inc., the number of rigs drilling for oil in the United States rose 29 last week to 551, the biggest week-over-week increase since mid-April 2013, with the number of oil rigs in operation the most since late November 2015. The count was 41 higher than the same week in 2016, reinforcing the belief that rising U.S. oil production would keep the market oversupplied.

The rig count is an indicator of the trend line in domestic production.

The Energy Information Administration last week showed U.S. production nearly flat on a week-over-week basis during the week-ended Jan. 13 at 8.944 million bpd after a 176,000 bpd surge week prior.

However, the International Energy Agency last week projected U.S. tight oil output would increase by 170,000 bpd this year after a decline of nearly 300,000 bpd last year. Investment bank Goldman Sachs sees shale oil production rising by 265,000 bpd this year from last year's level if dormant rigs are activated.

At settlement, NYMEX March West Texas Intermediate futures declined 47 cents to $52.75 per barrel (bbl) after reversing off a $53.47 four-day high on the spot continuation chart. ICE March Brent crude futures eased 26 cents to $55.23 bbl. NYMEX February ULSD futures fell 1.94 cents to $1.6265 gallon while February RBOB futures eked out a fractional seven-point gain to settle at $1.5667 gallon.

George Orwel can be reached at george.orwel@dtn.com