Oil Falls on Growing US Drilling Activity

"The cuts in Opec production from the start of 2017 should start to show up between mid-March (now) and mid-April". "Any extension of the cut agreement should be with non-OPEC".

The total rig count is still 978 from its peak before the impact of the oil crash hit drillers, but that gap continued to shrink last week.

The Asian surplus will pressure global oil prices and weigh on the budgets of major oil producing nations but may also help spur growth in demand needed to soak up the excess.

Evidently, WTI prices remain below the psychological $50 mark as oversupply worries continue to dent sentiment. Russian Federation and 10 other non-OPEC producers agreed to cut half as much. Opec's 11 members with supply targets cut output to 29.68 million bpd in February, 123,000 bpd more than required by target.

OPEC next meets to decide output policy on May 25 in Vienna. According to the most recent data, for January, inventories of crude and refined products stood 278 million barrels above this level. It however clarified that that the excess production went into stockpiles and that it intends to stick to its deal.

A second factor behind the recent decline in oil prices is that USA production has rebounded at a remarkable rate. Both however expect the Non-Opec output to rebound this year.

"The market is looking at lower demand, while supply is to see a marginal increase", said a futures trader from Kuala Lumpur. Overall non-Opec compliance has been also been a concern with some estimates suggesting only ~64 per cent compliance so far. Brazil and Canada will increase by a higher level of 260,000bpd; Kazakhstan by 140,000 and smaller non-Opec countries in Africa will add several thousand barrels.

Looking ahead, nimble USA oil companies seem likely to keep raising output, even if oil prices remain near today's level. USA oil rig count has been increasing since June and is now at its highest since September 2015.

USA oil output has surged to over 9.5 million barrels per day from 8.5 million barrels per day in June of the previous year.

"The combination of falling imports and stronger crude runs should lead to substantial inventory cuts over the coming months", they said.

The group wants stocks in the industrialised world to fall to the average of the past five years.

USA oil stocks fell marginally last week after increasing for nine straight weeks but are still near a record high.

WTI crude has "found itself vulnerable to heavy losses...as the rising drilling activity in the US reinforced the oversupply fears", said Lukman Otunuga, research analyst at FXTM, in a note. Until then, it will be hard for oil prices to break higher.

The technical picture also looks weak and further downside can not be ruled out.

"Hedge selling from producers and long-liquidation from funds is a bearish cocktail", said Ole Hansen, Saxo Bank's head of commodity strategy.