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Oil recovers after Fed hike as tighter market looms

by December 15, 2016 General

By Christopher Johnson

LONDON (Reuters) – Oil prices recovered ground on Thursday after sharp falls in the wake of the U.S. interest rate rise as investors anticipated a tighter market in 2017 due to planned output cuts led by OPEC and Russia.

The dollar rose to a 14-year high against a basket of other currencies after the U.S. Federal Reserve raised rates for the first time in a year on Wednesday.

A stronger dollar, in which oil is traded, tends to hit crude demand as it makes fuel purchases more expensive for users of other currencies.

North Sea Brent crude oil was up 45 cents at $54.35 a barrel by 1030 GMT. U.S. light crude oil was up 20 cents at $51.24 per barrel.

“We got sold off because of the strong dollar, but any weakness should be temporary,” said Tamas Varga, senior market analyst at brokerage PVM Oil Associates in London.

“The market has faith in the OPEC/non-OPEC deal,” he added.

The Organization of the Petroleum Exporting Countries and other producers led by Russia have promised to cut production by almost 1.8 million barrels per day (bpd) in an attempt to clear a global oversupply that has depressed prices for more than two years.

ANZ bank said on Thursday oil markets would move into a substantial deficit in the first quarter of 2017 if OPEC and other producers reduced output as promised.

“This will likely push oil prices well above $60 per barrel early next year,” ANZ analysts said in a note to clients.

Oil companies have slashed costs in order to survive the low price environment, industry data show.

“2017 will be the third year investments go down, with 3 percent (declines). You need to go back to the ’80s to see three consecutive years of investment cuts,” said Audun Martinsen, vice president for Oilfield Service Research at Rystad Energy.

Crude prices received some support from reports of falling U.S. crude inventories.

U.S. Energy Information Administration (EIA) data showed that commercial crude inventories last week declined by 2.56 million barrels to 483.19 million barrels.

(Addition reporting by Henning Gloystein and Keith Wallis in Singapore; Editing by Jason Neely)