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Following the Opec deal which was later joined by non-Opec members, few had expected the international oil market to eliminate the long persistent global supply glut overnight. But even fewer had expected the bull rally to last only for two months. But oil prices have been tested hard of late, primarily by increasing US shale production, sluggish demand, and record inventories.

The fact that the oil futures which had gone up to $56 a barrel just last month with investors taking massive long positions, have humbled to $49per barrel. The Opec cuts were surely good enough to prevent a repeat of massive gluts seen in the yesteryears, but it has not proved anything beyond it.

Recall that Saudi Arabia has stuck to its word and is contributing more than its promised share in the reduced output. But same cannot be said of other members; especially the ones not part of Opec. All eyes now are on the next Opec meeting due in May, and the market consensus seems to be favouring flat to sluggish oil prices by then.

Some still predict oil prices to rebound stronger, as the likes of Morgan Stanley and Citigroup Inc. expect higher prices in the second half of 2017. But the real deal is the resurgence and resilience shown by the US oil producers. The concerns that shale producers will not sustain below $50/bbl have largely been brushed aside.

The US oil producers have upped their game on technology, as they seem to have adopted new ways of fracking and drilling that allow them to extract more hydrocarbons from wells. The breakeven cost of US oil producers has certainly gone down, and their output has been rising. The US EIA expects the output to rise to 9.2 million barrels per day in 2017.

And the potential for US output does not refuse to bog down, as the latest weekly rig count data show a massive increase of 14 rigs in the US alone.

A large number of oil analysts still believes that Saudi Arabia would be able to persuade other Opec members to extend the deal past the six-month duration. Same conviction is not seen when it is about Russia joining the effort to extend the reduced output deal. Should that happen, Opec will struggle to achieve the goal of higher prices, and will risk losing further market share to non-Opec producers.

Copyright Business Recorder, 2017

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