Can the oil rally keep on going?

The short answer is yes. Brent crude oil reached a modern high for the period last week, arriving at approximately $72 a barrel and holding gains since prices bottomed in late December to over 35 percent. Looking forwards, there is accommodation for further upward shift in the oil price.  Forecasts from all the principal energy bodies, including Opec and the International Energy Agency, confirmed last week that the market is now in a supply deficit.

That is because of a consolidation of voluntary supply cuts, principally from Saudi Arabia, and the reduction in productivity from Venezuela and Iran, which have been knocked by US sanctions. It is, however, worth noting that prices are nevertheless far below the four year high of $86 a barrel in October, which is down to the long-term shift in the market brought on by the US shale production.

Higher prices likely mean increased supplies from the US, which has already developed into the world’s largest oil producer. New pipelines opening in the second half of this year should make it smoother to take that rising output to market. Traders are also watching to determine whether Opec responds to appeals from US president Donald Trump to ensure prices do not rise too high. Saudi Arabia, in particular, may not be in a rush to choke off the rally given its dependence on oil revenues but neither will it be indifferent to the considerations of its oldest ally. Short-term, prices may require to move higher before precipitating a response. But when it happens, the switch could be intense, which is staying some traders’ hands.