Where next for the oil price?

The price of oil has drifted above $55 a barrel, the highest in 18 months. And pretty much everyone seems to think it will keep rising.

The bulls are out in force in the oil market. The price of black gold has drifted above $55 a barrel, the highest in 18 months. And pretty much everyone seems to think it will keep rising. In the US, futures traders have not been this bullish on oil prices for ten years. The trouble, however, is that "market fundamentals have yet to catch up" with traders' optimism, says Georgi Kantchev in The Wall Street Journal.

Bulls point to reports claiming that last year's deal by Opec on production cuts has been broadly successful, with around 90% of the agreed output reductions implemented. That would be pretty impressive compared with previous agreements the members of the oil-exporting cartel are notorious for cheating on their quotas in order to maximise revenue but it is disputed by some analysts.

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Evidence from shipping data suggests that the cuts are "nowhere near" 90%, according to Ambrose Evans-Pritchard in The Daily Telegraph, while JP Morgan is also among the sceptics. It says that Iraq, Venezuela, Algeria and the United Arab Emirates are increasing output above their quota levels. In the meantime, adds Kantchev, Nigeria and Libya are two big producers that were exempt from the deal, while Russia, which is not a member of Opec, promised to rein in production but has only delivered a third of its targeted figure.

Meanwhile, US stockpiles have reached their highest level since data began in the 1980s, according to America's Energy Information Administration. That puts the spotlight back on US output, which is only going to increase. The number of rigs drilling for crude in theUS has hit a 16-month high, and has doubled since it bottomed last May. "America's frackers have cranked up output faster than Opec thought possible," says Evans-Pritchard. They have become vastly more productive and cost-efficient in the past few years. The break-even point for some fields has dwindled to less than $40.

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This suggests that US shale producers can cap a rally in prices, and oil seems highly unlikely to see $100 a barrel anytime soon. The main issues now are whether the Opec deal will be extended when it comes up for renewal in June, and how fast US production can climb. At the very least, it seems that the huge market glut is going to be absorbed far more slowly than some investors thought which means that prices look vulnerable to a sharp setback.



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