Oil hovers near three-year high despite rising US output

[CALGARY, Alberta] Oil hovered near a three-year high above US$70 a barrel on Monday on signs that production cuts by Opec and Russia are tightening supplies, although analysts warned of a "red flag" due to surging US production.

International benchmark Brent crude futures last traded 29 cents higher at US$70.16 by 1937 GMT, having risen to a high of US$70.37 a barrel earlier in the session.

US West Texas Intermediate (WTI) crude futures gained 51 cents at US$64.81 a barrel. Both benchmarks hit levels not seen since December 2014, although trading was thin due to a holiday in the United States.

A production-cutting pact between the Organization of the Petroleum Exporting Countries, Russia and other producers has given a strong tailwind to oil prices.

Growing signs of a tightening market after a three-year rout have bolstered confidence among traders and analysts.

"It's catching a lot of people by surprise and I think (prices) are sustainable," said Phil Flynn, an analyst at Price Futures Group. "We're seeing the reality of strong demand and declining supplies."

Bank of America Merrill Lynch on Monday raised its 2018 Brent price forecast to US$64 a barrel from US$56, forecasting a deficit of 430,000 barrels per day (bpd) in oil production compared to demand this year.

"Opec and non-Opec producers remain committed to production cuts at the same time world oil demand continues to increase,"said Andrew Lipow, president of Lipow Oil Associates in Houston.

"As we go through 2018, the market is also going to continue to look at geopolitical supply disruptions that could occur in Libya, Nigeria and Venezuela."

RED FLAG

Still, some analysts have warned that the 13 per cent rally since the start of the year could peter out due to global refinery maintenance and rising North American production.

US energy companies added 10 oil rigs in the week to Jan 12, taking the number to 752, energy service firm Baker Hughes said on Friday.

That was the biggest increase since June 2017.

In Canada, energy firms almost doubled the number of rigs drilling for oil last week to 185, the highest level in 10 months.

Vienna-based consultancy JBC Energy expects US production to grow by 600,000 bpd in the first quarter of 2018 compared to a year earlier.

"From a fundamental perspective, the surge in US managed money raises a clear red flag for us. We see the US complex as decidedly bearish over the next two months." But Mr Flynn said a fast climb in US output is not so clear.

"The realities of the shale market are starting to sink in. Shale producers have to add a lot of rigs, frack crews and add a lot of investment. It takes time to raise that production."

REUTERS