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Oil flirts with $70, but is the market overheating?

The Mellitah Oil and Gas terminal on the outskirts of Zwara in western Libya. Mellitah Oil and Gas is a joint venture between Italy’s ENI and Libya’s National Oil Company and the Greenstream pipeline runs from Mellitah to Gela in Sicily. (AFP)
LONDON: Brent crude continued to hover near $70 per barrel on Wednesday with prices up 15 percent since early December, but some cautioned the oil market could be overheating.
Jean-Pierre Durante, head of quantitative research at Swiss bank Pictet, told Arab News the “price doesn’t seem justified on our fundamentals.”
Pictet is forecasting an average 2018 price of $63 per barrel, close to a recently revised figure of $62 per barrel predicted by Goldman Sachs.
Durante said oil was benefiting from bullishness about the global outlook — with stock markets buzzing, in part due to President Trump’s success in pushing through tax cuts at the end of 2017.
“For the fist time since the financial crisis we have synchronized growth around the world, in both advanced and emerging markets,” said Durante.
But he added: “Non-conventional production, in particular US shale oil, is expected to continue to play an important role in 2018 and 2019, forcing OPEC to keep restraining production.
The price has been buoyed recently by geopolitical tensions in the Middle East, protests in Iran and fears about further disruption of supplies from strife-hit Venezuela, said Durante.
He also pointed to recent data from the American Petroleum Institute that showed US crude inventories fell by 11.2 million barrels in the week to Jan. 5 to 416.6 million barrels.
However, the US Energy Information Administration on Wednesday forecast that US oil production would exceed 11 million barrels per day (bpd) by the end of 2019, shattering previous records as American producers exploit higher prices to bring more shale to market.
Heightened US activity could weaken the price despite an extension of supply constraints agreed by OPEC and non-OPEC countries at a meeting in Vienna in November.
Worldwide, the agency sees oil consumption rising by about 1.7 million bpd in both 2018 and 2019, led by China and India.
Investors have been piling into oil since December with the Financial Times reporting on Monday that the net long position in Brent crept up to a record high of 565,459 contracts — or more than half a billion barrels of oil. Combined with West Texas Intermediate, the US oil benchmark, speculators have amassed bullish bets over 1 billion barrels of crude, said the FT.
But another warning about a possible bubble has come from Commerzbank’s Eugen Weinberg, head of commodities research, who told CNBC that the price was likely to correct by at least 10 to 15 percent over the coming months “because the current fundamentals are not justifying this kind of strength,” he said.

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