U.S. Markets open in 5 hrs 30 mins

Oil falls as OPEC output stays high, dollar rises

Pump Jacks are seen at sunrise near Bakersfield, California October 14, 2014. REUTERS/Lucy Nicholson/Files

By Christopher Johnson

LONDON (Reuters) - Crude oil prices dropped on Monday as the dollar rose and on expectations that OPEC production would remain high, stoking worries of oversupply despite declining U.S. rig operations.

The Organization of the Petroleum Exporting Countries (OPEC) pumped at a two-and-a-half year high of 31.22 million barrels of oil per day (bpd) in May, Reuters monthly survey shows.

The 12-member cartel meets in Vienna on Friday but is expected to maintain its current production policy, keeping the world oil market amply supplied for the foreseeable future.

Front-month Brent crude fell $1.00 a barrel to a low of $64.56 before recovering a little to around $64.65 by 1025 GMT. U.S. light crude was down 75 cents at $59.55 a barrel.

"OPEC continues to produce well above target, and also well above demand for its oil," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.

The dollar gained 0.3 percent against a basket of currencies on Monday, making oil more expensive to holders of other currencies.

The euro fell after Greece missed a self-imposed Sunday deadline for reaching an agreement with its lenders to unlock aid, keeping alive fears of a debt default and potential exit from the euro zone.

Crude oil jumped almost 5 percent on Friday, its biggest rally in a month, as a larger-than-expected fall in U.S. oil rigs in operation sent markets upwards.

But analysts said U.S. oil production remained on track for year-on-year growth, despite the recent falls in rig 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, 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 in a note to clients.

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

Morgan Stanley said oil prices could fall in the second half of this year, although a return to this year's low was 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 in a note.

(Additional reporting by Henning Gloystein in Singapore; Editing by Susan Thomas and William Hardy)