Oil prices drop on dollar, oversupply

By Christopher Johnson

LONDON (Reuters) - Oil prices fell more than 2 percent on Wednesday as the dollar strengthened and as oversupply weighed on markets ahead of a key meeting of OPEC oil producers.

Core Gulf members of the Organization of the Petroleum Exporting Countries, which pumps over a third of the world's oil, have a consensus to maintain the group's oil output at its meeting on Friday, a senior Gulf OPEC source has told Reuters.

"There is consensus among Gulf OPEC countries, and others, to keep the (production) ceiling unchanged," the OPEC delegate told Reuters in Vienna. "Nobody wants to rock the boat. The meeting is expected to be smooth sailing."

The dollar gained around 0.4 percent against a basket of other currencies as the euro slipped, making fuel more expensive to holders of other currencies.

Benchmark Brent crude oil for July fell $1.75 to a low of $63.74 before recovering a little to around $63.90, down around 2.5 percent, by 1010 GMT. U.S. crude was $1.40, or 2.25 percent, at $59.86 a barrel.

Brent collapsed last year, falling to almost $45 a barrel in January from above $115 last June, squeezing many oil producers in countries outside OPEC, including U.S. shale drillers.

Comments by OPEC ministers in Vienna this week have reinforced a view among investors that the big Middle East oil producers will carry on pumping oil nearly flat-out for many months to come, content that lower prices will knock out some of their competitors.

Saudi Arabian Oil Minister Ali al-Naimi told a conference organised by OPEC in Vienna on Wednesday that the group was "currently meeting global demand and I don't see this changing".

"In terms of the long-term energy outlook, the future looks very positive," the veteran Saudi minister said.

OPEC is pumping around 2 million barrels per day (bpd) more than needed at the moment, helping fill oil inventories worldwide and keeping the price of oil for delivery now at a discount to futures prices.

Some analysts have said there is a chance OPEC could even increase its production target this week.

"With heightened geopolitical risk threatening oil supplies in the Middle East and North Africa, it is highly unlikely that OPEC will reduce the quota, but an increase is possible," Barclays said in a preview note of Friday's meeting.

Analysts from Citi said this week that given OPEC was widely expected to maintain its output policies, the global surplus would last well into 2016.

(Additional reporting by Henning Gloystein in Singapore; Editing by Pravin Char and Elaine Hardcastle)