Crude oil prices hit new multi-year highs yesterday as production cuts led by the Organisation of Petroleum Exporting Countries (OPEC) and healthy demand helped to balance the market, but analysts warned of possible overheating.
Reuters reported that a broad, global market rally, including stocks, has also been fuelling investment in crude oil futures.
U.S. West Texas Intermediate (WTI) crude futures rose to $63.67, the highest since December 9, 2014, before settling at $63.60 a barrel.
Brent crude futures also hit $69.37, the highest since May 2015 before closing at
$69.33 a barrel.
OPEC, together with Russia and a group of other producers, last November extended an output-cutting deal to cover all of 2018.
The cuts were aimed at reducing a global supply overhang that had dogged oil markets since 2014.
OPEC is cutting output by even more than it promised and the restraint is reducing oil stocks globally, a trend most visible in the U.S., the world’s largest and most transparent oil market.
The cartel had at its November 30, 2017 meeting agreed to extend oil output cuts until the end of 2018 as part of the global efforts to eliminate excess oil supply in the international market.
The current deal, under which OPEC and non-OPEC producers are cutting supply by about 1.8 million barrels per day (bpd) in an effort to boost oil prices, expires in March 2018.
The decision to extend the production cuts saw crude oil prices rising, with the global benchmark Brent trading at over $69 per barrel yesterday.
However, a major factor countering efforts by OPEC and Russia to prop up prices is U.S. oil production, which has soared more than 16 per cent since mid-2016 and is fast approaching 10 million bpd.
Only OPEC kingpin Saudi Arabia and Russia produce more.
With oil prices rising above $60, Russia had expressed concern that an extension of the cuts for the whole of 2018 could prompt a spike in crude production in the U.S., which is not participating in the deal.
Russia needs much lower oil prices to balance its budget than OPEC’s leader Saudi Arabia, which is preparing a stock market listing for national energy giant Aramco this year and would hence benefit from pricier crude.
However, some in the producers’ group fear current price gains could prompt shale companies to flood the market.
U.S. crude oil production is expected to hit 10 million bpd next month, leaving only Russia and Saudi Arabia at higher levels.
American Petroleum Institute data on Tuesday showed U.S. crude inventories falling by 11.2 million barrels in the week leading to January 5.
Additionally, the U.S. Energy Information Administration (EIA) raised its 2018 world oil demand growth forecast by 100,000 bpd from its previous estimate.
Oil prices have risen more than 13 per cent since early December, and there are indications of overheating. Analysts warned that the market is ignoring U.S. production increases at its peril.