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While oil's rise above $50 a barrel for the first time in seven months is a landmark for the market, analysts appear to have no clear idea how long this year's crude rally might last.
Brent crude, used to price much of the world's oil, and West Texas Intermediate, the U.S. benchmark, both topped $50 a barrel Thursday before edging lower. Brent was recently at $49.63 and U.S. oil was at $49.46.
The return of $50 oil is the latest development in a market that has confounded investors, producers and traders since a selloff caused by a global oversupply of crude began in 2014. Prices had fallen below $30 a barrel at the beginning of this year-a level not seen since early last decade-before mounting a recovery.
Many analysts cite strong demand from major emerging countries such as China and India, coupled with supply constraints on many main producers in the Middle East, as a reason to remain bullish on oil.
However, those in the "bear" camp reckon there is still plenty of global supply that could potentially come on line, with a number of U.S. producers of shale oil ready to step up production as prices rise. The return of thousands of barrels of crude onto global markets from Iran is also helping keep oil plentiful.
"The brave new world of petroleum promises to be volatile and the 'new normal' for oil prices makes stability elusive," analysts at Citi said in a report.
In recent weeks, supply disruptions from Nigeria to Canada to Libya took enough oil off the market to launch Brent prices back above $50. In the lead-up to those outages, waning North American output helped drain a massive overhang in U.S. stockpiles, which have eased from 80-year highs reached weeks ago.
Some analysts expect prices to creep higher this year. The summer driving season is on the horizon in the U.S. and other advanced economies, a period that normally drives up consumption of oil products, chiefly gasoline.
Elsewhere, low prices have already helped fuel a big rise in demand. In China, oil imports have risen 12% this year, government data show. That is thanks in part to the country's efforts to fill up its strategic reserves of oil. The gain has also been supported by the rise of independent Chinese refiners, known as teapots, that have been processing more oil for both the domestic and export markets.
In India, fuel consumption rose 10% in the first quarter as auto sales there hit a record, according to International Energy Agency estimates.
"The U.S. driving season is approaching," said Peter Lee, oil-and-gas analyst at BMI Research in Singapore. "The market is [also] counting on gasoline demand in China and India."
Another factor to keep a floor under prices: The Organization of the Petroleum Exporting Countries, long the dominant force in setting global prices, has lost much of its ability to loosen the oil taps because of reduced spare capacity among major producers.
While the price recovery is welcome for oil producers and services companies that help them drill wells, few expect a return of the boom years of the first half of the decade, when $100 oil was a fixture of the market and helped fund far-flung ventures in remote locales offshore and in the Arctic. Those days also seeded a drilling renaissance in the U.S., where the sector is now barely getting by and suffering a wave of bankruptcy filings.
Still, some analysts said prices were likely to be kept in check by the fact that there are large volumes of supply ready to return to the market. For one thing, recent outages among exporters are likely to be temporary, they said.
At the same time, the U.S. is littered with drilled wells that haven't been activated and $50 oil makes doing so profitable, according to Citigroup, while prices at $60 are likely to spur fresh drilling. The recent price rally could release 400,000 barrels a day or more of new U.S. output.
The bank's analysts forecast that oil prices could reach around $65 a barrel by the end of 2017, though they said they have only "65% or so confidence in this price path."
Source: Wall Street Journal