SINGAPORE: Crude oil prices dropped on Monday on expectations that OPEC output would remain high after rising in May, stoking worries of oversupply despite declining U.S. rig operations.
Crude oil prices jumped almost 5 percent on Friday, their biggest rally in over a month, as a bigger than expected fall in U.S. oil rigs in operation set off a renewed rush of bullish bets.
But prices eased on Monday due to near-record production in most oil-producing regions, especially the Middle East.
Front-month Brent crude futures LCOc1 had declined 35 cents to $65.21 per barrel at 1.23 a.m. ET on Monday. U.S. crude futures CLc1 were down 45 cents at $59.85 a barrel.
Oil output by the Organization of the Petroleum Exporting Countries (OPEC) likely hit a two-and-a-half year high of 31.22 million barrels per day (bpd) in May and production is not expected to be cut during a meeting of the group this Friday.
U.S. bank Morgan Stanley said that prices could fall in the second half of the year, although it said it was unlikely they would drop back to their six-year lows from January.
“We have growing concerns about crude fundamentals and prices in 2H15 and 2016 after the quick recovery (since January).
The market appears complacent about rising OPEC production and upcoming Iran discussions, both of which could more than offset U.S. declines,” Morgan Stanley said on Monday.
“That said, retesting YTD (year-to-date) lows is very unlikely. Healthy transport demand, reflected in strong refining margins, capex cuts and low spare capacity should limit downside.”
Analysts said that production in the United States also remained on track for year-on-year growth despite recent falls in rigging activity.
“The drop in the U.S. oil rig count resumed last week with 13 rigs idled.
Despite this decline, we believe that should WTI prices remain near $60/bbl, U.S. producers will ramp up activity given improved returns with costs down by at least 20 percent and producers increasingly comfortable at the current costs/revenue/funding mix,” Goldman Sachs said.
The bank said that it expected U.S. oil production growth of 155,000 bpd in the fourth quarter of this year compared to the same period in 2014.