Oil falls to below $56 on signs of higher output

Oil fell more than USD 1 a barrel to below USD 56 on Monday as a rise in US drilling and higher OPEC output put the brakes on a rally that saw prices score their biggest third-quarter gain in 13 years.

US energy companies added oil rigs for the first week in seven and Iraq announced its exports rose slightly in September when OPEC overall boosted output according to a Reuters survey.

Brent crude, the global benchmark, was down USD 1.03 at USD 55.76 a barrel at 1140 GMT. It notched up a third-quarter gain of around 20 percent, the biggest third-quarter increase since 2004 and traded as high as USD 59.49 last week.

“I think it’s going to be a struggle to move above $60 Brent,” said Olivier Jakob, oil analyst at Petromatrix.

US crude was down USD 1.07 at USD 50.60. The US benchmark posted its strongest quarterly gain since the second quarter of 2016.

The rally was driven by mounting signs a three-year supply glut is easing, helped by a production cut deal by global producers led by the Organization of the Petroleum Exporting Countries.

“Brent crude oil prices have gone from strength to strength as surplus oil stocks are being depleted,” Bank of America Merrill Lynch said in a report. “Importantly, this rally is supported by a tighter physical market, providing a fundamental backbone that was not present before.”

But a Reuters survey on Friday found OPEC oil output rose last month, gaining mostly because of higher supplies from Iraq and also from Libya, an OPEC member exempt from cutting output.

The Libyan gain appears short-lived, however. The country’s largest oilfield, Sharara, has been closed since Sunday, an engineer at the field and a Libyan oil source said.

Middle Eastern oil producers are concerned the price rise will only stir US shale producers into more drilling and push prices lower again. Key OPEC producers consider a price above USD 60 as encouraging too much shale output.

In February, oil industry sources said Saudi Arabia would like to see oil around that USD 60 level.

Technical charts suggest the rally may be running out of steam. Jakob of Petromatrix said Brent’s weekly chart had formed a “shooting star,” a pattern seen as indicating a market has reached a top.