Oil prices fall as OPEC output seen staying high, Asia economies stutter

By Henning Gloystein

SINGAPORE (Reuters) - Crude oil prices dropped on Monday on expectations that OPEC production would remain high and as Asia's manufacturing output stuttered, stoking worries of oversupply despite declining U.S. rig operations.

Crude oil prices jumped almost 5 percent on Friday, their biggest rally in over a month, as a bigger than expected fall in U.S. oil rigs in operation sent markets upward, but contracts eased on Monday.

Front-month Brent crude futures had declined 44 cents to $65.12 (43 pounds) per barrel at 0702 GMT (8:02 a.m.) on Monday. U.S. crude futures were down 46 cents at $59.85 a barrel.

Oil output by the Organization of the Petroleum Exporting Countries (OPEC) likely hit a two-and-a-half year high of 31.22 million barrels per day (bpd) in May and production is not expected to be cut during a meeting of the group this Friday.

Struggling Asian economic growth also weighed on markets. China's manufacturing sector showed scant signs of picking up in May as demand stayed stubbornly weak, while exports in South Korea suffered their biggest annual drop in six years although Japanese manufacturers saw a modest rebound in new orders.

Morgan Stanley (NYSE:MS) said that prices could fall in the second half of the year, although it added that returns to January lows were unlikely.

"We have growing concerns about crude fundamentals and prices in 2H15 and 2016 after the quick recovery (since January) ... The market appears complacent about rising OPEC production and upcoming Iran discussions, both of which could more than offset U.S. declines," Morgan Stanley said on Monday.

"That said, retesting YTD (year-to-date) lows is very unlikely. Healthy transport demand, reflected in strong refining margins, capex cuts and low spare capacity should limit downside."

Analysts said that production in the United States also remained on track for year-on-year growth despite recent falls in rigging activity.

"The drop in the U.S. oil rig count resumed last week with 13 rigs idled ... Despite this decline, we believe that should WTI prices remain near $60/bbl, U.S. producers will ramp up activity given improved returns with costs down by at least 20 percent and producers increasingly comfortable at the current costs/revenue/funding mix," Goldman Sachs said.

The bank said that it expected U.S. oil production growth of 155,000 bpd in the fourth quarter of this year compared to the same period in 2014.