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    Oil Price Gains Continue, Driven by Greater US Demand

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    Global oil prices could go up to as high as $70/bbl by this summer; however, the overwhelming oil supply will likely keep price gains contained in the longer run.

    Kristian Rouz – After the US dollar slipped following the Federal Reserve’s fairly dovish meeting minutes published on Wednesday, global oil prices extended gains, supported by declines in US inventories and anticipations of higher demand for fuel.

    With manufacturing in the UK, Germany, and the US gaining momentum, the demand for oil in the advanced nations is poised to increase, while the OPEC oil cuts are intact, limiting the supply side of the market.

    However, the unenthusiastic investor perception of 'commodity currencies', namely, the Brazilian real and the Australian dollar, suggests the overall raw materials market is still under pressure and oversupply concerns might still linger.

    Benchmark Brent crude rose by $1.08/bbl to $56.92/bbl on Thursday, while US oil advanced to $54.64/bbl, with the price gap narrowing between the European and North American markets as the US turns to increased protectionism in foreign trade.

    "Confirmation of the bullish set of inventory data from the EIA this afternoon will send prices to the upper end of the current trading range," Tamas Varga of London-based PVM Oil Associates said. "If, however, the figures disappoint those who have gone long overnight and this morning, they will likely run for the exit."

    The US Energy Information Administration (EIA) said on Wednesday that US oil stockpiles decreased by 884,000 bbl in mid-February to 512.7 mln bbl, while the previous expectations were of an increase of 3.5 mln bbl. US petrol and distillate inventories also fell during the same period, according to a separate report by the American Petroleum Institute (API).

    Still, according to estimates by BP analysts, oil prices have only limited room to further extend gains, with a price of $100/bbl being rather unlikely. The abundance of oil still dominates the market, and the recent output cuts are only superficial and temporary, meaning global supply-side capacity is still overwhelmingly greater than that of the demand-side.

    Technically speaking, BP analysts say, the global supply might reach about 2.5 trln barrels, while cumulative demand would still stand at 0.7 trln bbl in 2015-2035, subsequently increasing to 1.2 trln bbl over the long run, up to 2050.

    “It seems to me increasingly likely that some barrels of technically recoverable oil will never be extracted, there’s just so much oil. Why does that matter? This matters because it could profoundly change the nature of oil markets,” Spencer Dale of BP Plc said.

    The oil market thus remains a seller’s market, while global producers set the output caps supporting the prices at comfortable levels. However, some readjustments on the supply side remain a possibility, with lower production cost suppliers gaining a market advantage over their higher-cost counterparts.

    Bank of America, meanwhile, said the average Brent oil price would fluctuate within the $50-70/bbl range until 2022, having downgraded their estimates from the previous $55-75/bbl expected range.

    “Below this level, oil supply rationing and rapid EM (emerging market) demand growth should push prices higher. Above it, we see a surge in global oil supplies and EM demand destruction curbing any additional price gains,” BofA's global commodity research unit said. “In fact, just as spot oil prices rose in recent months, partly due to OPEC cuts, long-dated oil prices have been falling steadily. The drop, in our view, has partly been driven by a dramatic productivity revolution in shale oil economics.“

    Citigroup also sees oil prices rallying up to $70/bbl in the near-term, driven by both the OPEC production cuts and gains in manufacturing and economic activity in many of the world’s economies. However, analysts at Commerzbank AG are expecting oil prices to drop to $40-45/bbl by late 2017 due to the economic uncertainties in the advanced nations and the persistent abundance of supply.

    Given the steady global oil supply, the only variable in the oil price equation is the pace of economic growth in the world’s leading economies. Should the advanced economies gain momentum amidst Trumponomics in the US, post-Brexit readjustment in the UK and the Eurozone, and disinflation-ridden Japan, oil price will increase, pushing emerging market currencies higher and spurring global investment across-the-board.

    However, such a price-increase cycle will go bust as soon as oil producers relax their price caps, on the one hand, and US shale production recovers from the devastating disinvestment, on the other.

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