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Oil Rallies, but for How Long?

Oil has been the big news this week.

Yesterday saw oil rise for the third consecutive day, as investors speculated over what “extraordinary measures” we can expect from OPEC to rebalance the oversupply issues in the medium to long-term, writes FXTM Research Analyst, Lukman Otunuga.

Oil has been the big news this week, with OPEC becoming increasingly confident that the market is rebalancing. Investors initially questioned the sustainability of the rally, but reports that Saudi Arabia has cut next month’s allocation by 560,000 bpd, allayed those fears and saw oil chart a 2% rise on Tuesday. The International Monetary Fund (IMF) gave oil bulls another reason to smile on Tuesday evening, forecasting a 3.7% increase in global economic growth for 2018, which suggests demand for fuel will grow as well. This supported the price action, and saw oil rise for the third day in a row on Wednesday.

It has been a tricky year for OPEC, and producers committed to the production cuts, will certainly be heartened by this latest turn of events. Whether this price action can be maintained, largely depends on US Shale production. OPEC’s major competitor has increased American output by nearly 10% this year, reducing the effectiveness of the cartel’s production cuts in the process. Hurricane Nate provided some reprieve, taking around 1.49 million bpd offline over the weekend, which helped boost the short-term price action. However, if U.S Shale views Saudi Aramco’s 560,000 bpd reduction next month as an early Christmas present and ramps up production accordingly, then this week’s fragile re-balancing will be short lived.

The OPEC vs. U.S Shale showdown has been one of the major market themes of the year, and an ongoing issue for the last three. OPEC and Russia are reportedly in talks with other producers, including the U.S, to join the production cut and help stabilise the markets. Whether U.S producers will commit to the initiative remains to be seen, but OPEC’s General Secretary Mohammed Barkindo all but begged them to join in a public statement on Tuesday, suggesting the talks have been far from productive.

Barkindo did hint in an earlier address that “extraordinary measures” would be needed to balance the markets in the long and medium terms. Investors were already expecting the production sanctions to be extended again come March 2018, so his comment came as little surprise. With OPEC’s next meeting barely six weeks away, traders will be watching the headlines closely.

As we head deeper into the final trading quarter of 2017, the markets will be subject to intense scrutiny. The jury is still out on whether this week’s rally is likely to persist into the long term. The balance in the oil market is still fragile; U.S Shale remains a wildcard, and investors are still unclear what “extraordinary measures” OPEC has planned beyond March 2018.

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