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An oil and gas extraction site in western Colorado. Oil tumbled below $60 a barrel in New York with the OPEC+ alliance said to be set to agree to a production increase later this week. Image Credit: AP

New York: Oil tumbled below $60 a barrel in New York with the OPEC+ alliance said to be set to agree to a production increase later this week.

US crude futures fell 1.5 per cent to the lowest in more than a week on Tuesday, while its global counterpart Brent hit a two-week low. The widespread view among the producer group is that the market can absorb additional barrels, according to people familiar with the matter. That could put the alliance on track to implement the majority of the 1.5 million barrel-a-day output hike that's up for debate on Thursday.

Oil's underlying market structure has also weakened this week. The backwardation, an indication of tightening supplies, seen in key timespreads is shrinking. At the same time, some pockets of physical oil market strength appear to be wobbling, with observed flows of North Sea crude grades to Asia dropping in February to the lowest in four months.

"While the Saudi surprise cut really kick-started this move higher, the unwinding of that will be more difficult for the market," said Edward Moya, senior market analyst at Oanda Corp. "There is still significant risk for the short-term outlook."

Crude has rallied more than 20% since the start of the year with support from a range of factors, including Saudi Arabia's unilateral output cuts. The rollout of vaccines and an investor charge into commodities have also underpinned the gains. Even if OPEC and its allies restore 2.4 million barrels a day of crude output by June, global oil inventories are set to decline each month this year, according to an OPEC+ panel. India has reiterated a call for the group to increase its production from April.

"Prices were getting elevated enough that stabilizing the market makes sense," said Bill O'Grady, executive vice president at Confluence Investment Management in St. Louis. "It is a difference between what was expected and what was hoped. What you expect is that they will raise production, what you hope is that they don't."

Output increase

The Organization of Petroleum Exporting Countries and its allies must decide how much output is to be restored, with current reductions totaling just over 7 million barrels a day. The group is the largest actor in the oil market, with collective production covering more than 40% of worldwide demand.

Saudi Arabia always said that its voluntary supply reduction would only last for two months. The kingdom will start to roll back its extra cut as planned in April, but is still discussing internally whether to return all of the barrels in a single month, or over a longer period, said people familiar with the deliberations.

Meanwhile, oil shipments from OPEC's Persian Gulf producers edged higher last month, despite the Saudi cut. Increased shipments from Kuwait and Iraq more than offset lower flows from the UAE and Saudi Arabia, vessel-tracking data monitored by Bloomberg show.

In the U.S., crude inventories are expected to have declined last week, according to a Bloomberg survey. The industry-funded American Petroleum Institute will report its storage figures later Tuesday ahead of a U.S. government report on Wednesday.