Found out a format that worked!
ssh-keygen by default generates keys like:
-----BEGIN OPENSSH PRIVATE KEY-----
I tried other combinations until I found one that worked:
$ openssl genrsa -out privatekey
-----BEGIN RSA PRIVATE KEY-----
$ chmod 600 privatekey
$ ssh-keygen -y -f privatekey > publickey
Running the script again, results in a successful login:
localhost: Trying pubkey authentication with key file 'privatekey'
localhost: Login completed, opening dummy shell channel.
localhost: channel 0: new [client-session]
localhost: Requesting channel_open for channel 0.
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