US shale will put a cap on the oil price

Opec members are notorious for cheating on their production quotas. Indeed, cheating is so rife that 50% to 60% compliance is considered pretty good, says Spencer Jakab in The Wall Street Journal. But this time round the oil cartel’s discipline is better. According to JCB Energy, compliance with the cuts agreed late last year is around 88%.

That’s pretty good news for oil bulls, who have already seen the price more than double to $55 a barrel since early last year. Throw in a better outlook for demand as the US-led global economy is expected to strengthen a little, and the big glut is gradually being soaked up.

But how far can the rally go? As the International Energy Agency’s executive director Faith Birol points out, US production is set to rise as increasingly cost-efficient shale drillers grab market share. At present, the US oil industry is adding more new rigs every month than at any point in the past two years.

Producers in Brazil, Mexico and China are also profitable at $50-$55 a barrel. It may not be long, then, before a rise in production slows and caps the oil rebound.