US crude settles at $53.20, up 27 cents, as US supply concerns offset OPEC cuts

An oil pumpjack operates near Williston, North Dakota.
Andrew Cullen | Reuters

Oil pared gains on Tuesday as concerns about rising supply from U.S. shale output overshadowed an OPEC-led effort to cut global output, which has supported oil prices in a higher range.

U.S. light crude oil ended Tuesday's session 27 cents higher at $53.20, after earlier rising to $53.72.

Brent crude was 36 cents higher at $55.95 a barrel by 2:53 p.m. ET (1953 GMT) off a session peak of $56.46 a barrel.

An early morning rally lost steam as the dollar strengthened after U.S. Federal Reserve Chair Janet Yellen said she expects central bankers to raise interest rates at an upcoming meeting.

A stronger greenback makes dollar-denominated commodities such as crude oil more expensive to holders of other currencies.

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The two benchmarks fell 2 percent on Monday. They are both now in the middle of $5-per-barrel trading ranges seen since early December.

"The usually fairly volatile oil price has barely budged for two months, the reason being conflicting dynamics in the market," said Hans van Cleef, senior energy economist at ABN AMRO Bank in Amsterdam.

The Organization of the Petroleum Exporting Countries and other exporters including Russia have agreed to cut output by almost 1.8 million barrels per day (bpd) during the first half of 2017 in a bid to rein in a global fuel supply overhang.

The market has largely priced in the production cuts that OPEC and other producers agreed to in November, leaving little room for prices to break out of the range, said Tariq Zahir, managing member of Tyche Capital in New York.

"It would take either a supply outage or serious cuts to move it," he said. "The first month, obviously, OPEC is going to do the best it can, but after that, let's see what the second and third month bring."

Rising production in the United States, where increased drilling activity especially by shale oil producers, has undermined these efforts. U.S. crude output is up 6.5 percent since mid-2016 to 8.98 million bpd, its highest level since April last year.

U.S. shale oil production for March is expected to rise by the most in five months to 4.87 million bpd, its highest rate of since May last year, government data showed on Monday.

Compliance to OPEC deal has its limits: Expert

"Oil just appears to be caught in a range at the moment and mainly focused on those supply considerations," said Ric Spooner, chief market analyst at CMC Markets in Sydney.

Although OPEC countries are largely sticking to their agreement with compliance around 90 percent, investors suspect the cuts may not be maintained, preventing them from having a bigger impact on prices.

Many analysts say oil producers will have to cut production more quickly to drain the global oversupply this year.

"Based on OPEC's own numbers the message is loud and clear," said Tamas Varga, analyst at London broker PVM Oil Associates.

"Improve on compliance, cut production further and extend the deal for the second half of the year if you want to avoid yet another year of global oil inventory builds."

— CNBC's Tom DiChristopher contributed to this report.