March 11, 2020 / 2:45 AM / a month ago

UPDATE 9-Oil falls as Saudi, UAE plan for higher output capacity

* Saudi, UAE will add 3.6 mln bpd to oversupplied market

* Russia's Novak questions Saudi decision

* OPEC and EIA cut global oil demand forecast

* EIA says U.S. inventories rose 7.7 mln bbls in most recent week (Updates prices, adds quote, details on futures market, changes byline, dateline, previous LONDON)

By David Gaffen

NEW YORK, March 11 (Reuters) - Oil prices fell on Wednesday after Saudi Arabia and the United Arab Emirates announced plans to boost production capacity and OPEC and the U.S. Energy Information Administration (EIA) slashed oil demand forecasts because of the coronavirus outbreak.

Brent crude was down $1.01, or 2.7%, at $36.21 per barrel by 12:12 ET (1712 GMT), while U.S. West Texas Intermediate (WTI) crude was off $1.05 or 3% at $33.31.

With the collapse of coordinated output cuts by Saudi Arabia, Russia and others, the Saudi energy ministry has directed producer Saudi Aramco to raise its output capacity to 13 million from 12 million barrels per day (bpd).

UAE national oil company ADNOC also said it would raise crude supply to more than 4 million bpd in April and accelerate plans to boost its output capacity to 5 million bpd, a target it previously planned to achieve by 2030.

"Saudi's shock and awe strategy suggests to us that to bring Russia back to the negotiating table, it is serious in causing severe price and revenue pain for all oil producers," UBS analysts said in a note.

"Higher oil inventories will likely weigh on prices over the coming months."

Trading in long-dated Brent futures contracts points to expectations that supply will continue to rise. The current Brent front month contract recently traded at more than $5 below the six-month contract LCOc1-LCOc6, the biggest discount since January 2016.

Russian Energy Minister Alexander Novak said Saudi Arabia's plans to increase production capacity were "probably not the best option", adding Moscow had several phone calls with OPEC and non-OPEC members, but that no partners had agreed to its proposal.

Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) said in a monthly report that it expected global demand to rise by just 60,000 bpd in 2020, a reduction of 920,000 bpd from its previous forecast.

The U.S. Energy Information Administration (EIA) also said global oil demand is expected to dive by 910,000 bpd in the first quarter due to coronavirus outbreak.

Oil prices had climbed $2 earlier in the session on hopes that spending cuts by North American producers to cope with multi-year low crude prices would lead to a drop in output. Numerous U.S. companies have already cut back spending, including Occidental Petroleum Corp, Marathon Oil Corp and Diamondback Energy Inc.

"Any reduction in spending and drilling will take time to show up in actual production figures and is unlikely to mitigate the bearish impact of a massive Saudi output increase, in case the latter does happen," oil brokerage PVM's Tamas Varga said.

Weekly data on U.S. inventories showed little effect from the coronavirus outbreak. Crude stocks rose by 7.7 million barrels, but inventories of gasoline and diesel fell sharply, as refining runs remain at seasonally low levels.

"Demand for products is robust - which surprises me. It certainly is coming as a surprise to market watchers here as fear of the impacts to demand brought on by the coronavirus have not shown up," said Tony Headrick, energy market analyst at CHS Hedging.

Policymakers and central banks have been taking measures to bolster their economies against disruption caused by the coronavirus outbreak, the latest being the Bank of England which unexpectedly cut interest rates by half a percentage point on Wednesday.

"Oil's supply-demand dynamics still point to a bias for weakness, as Saudi Arabia and Russia engage in a price war that threatens to push global markets into oversupplied conditions, at a time when global demand is being eroded by the coronavirus outbreak," Han Tan, market analyst at FXTM.

A worker at Equinor's Martin Linge offshore oil and gas development has been diagnosed with the coronavirus and is being held in isolation, the Norwegian energy firm said. It said activity on the field will be reduced on Wednesday.

However, China's independent oil refiners are cranking up production as local governments begin to relax strict measures to contain the coronavirus and fuel demand begins to recover.

Reporting by Bozorgmehr Sharafedin in London, additional reporting by Yuka Obayashi in Tokyo and Laura Sanicola in New York; Editing by Bernadette Baum

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