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Oil Falls as Dark Clouds Appear Ahead of Producer Meeting

Oil prices fell on Thursday as OPEC warned of slowing demand and Russia hinted that there would only be a loose agreement with little commitments at the upcoming exporter meeting to rein in ballooning oversupply.

Meanwhile, Goldman Sachs said that productivity gains by U.S. shale producers were keeping alive its "deflationary outlook" for oil prices as drillers manage to adjust to lower prices instead of going out of business.

File photo of pump jacks at the Lukoil-owned Imilorskoye oil field outside the west Siberian city of Kogalym, Russia
Pump jacks are seen at the Lukoil-owned Imilorskoye oil field, as the sun sets, outside the west Siberian city of Kogalym, Russia, in this January 25, 2016 file photo. REUTERS/Sergei Karpukhin/Files - RTSDS3E REUTERS

Brent crude futures were at $43.66 a barrel at 0123 GMT, half a dollar, or 1 percent, below their last close.

U.S. West Texas Intermediate (WTI) futures were also down 1 percent at $41.60.

Russian oil minister Alexander Novak told a briefing that a deal on an output freeze scheduled this weekend will be loosely framed with few detailed commitments.

"The agreement will not be very rigidly formulated, it is more of a gentlemen's agreement," one of those present said, paraphrasing Novak's words at the gathering.

A second person present said: "there is no plan to sign binding documents."

This would make it unlikely that the meeting by top exporters in Qatar on Sunday will successfully rein in production of around 2 million barrels per day (bpd) of crude in excess of demand.

Morgan Stanley said in a note that "we think any agreement actually sets up bearish catalysts for the months ahead."

Where Does Oil Come From? 0:43

With the likelihood of a binding freeze by the Organization of the Petroleum Exporting Countries (OPEC) and Russia fading, analysts will look to the U.S. oil industry to see if lower drilling will result in falling production.

Here too, the outlook is for production to remain higher than many expected.

"Shale productivity gains remain a key driver of our long-term deflationary outlook for oil prices," said Goldman Sachs.

"Our analysis of shale productivity... (is) broadly in line with our expectations for 3 percent to 10 percent yoy (year-on-year) increases," it added.

With no end in sight to the supply glut, much will depend on demand to determine the size of the market's oversupply.

While demand has been strong, supported largely from Asia, OPEC on Wednesday cut its 2016 forecast for global demand growth and warned of further reductions.

World demand will grow by 1.20 million bpd in 2016, OPEC said in its monthly report, 50,000 bpd less than expected previously.

"Economic developments in Latin America and China are of concern... Current negative factors seem to outweigh positive ones and possibly imply downward revisions in oil demand growth."

Morgan Stanley pointed to several bearish risks for oil, including "significant selling pressure from producer hedging if prices rise... (and) reemerging macro headwinds."

The bank said it was "bearish oil prices into 2H16" and that "sustaining a price above $45 WTI in the front will be difficult... into 2017."