Oil prices running out of reasons to rally

OIL prices faltered at the start of the second week of the year, as fears set in about a rapid rebound in US shale production. For the better part of two months, optimism surrounding the Opec deal has buoyed oil prices, but bullish sentiment from speculators are showing early signs of abating, raising the possibility that the oil rally is running out of steam.

WTI and Brent sank more than 2.5 per cent in intraday trading last Monday, after a report at the end of last week showed another solid build in the US rig count, the 10th consecutive week that the oil industry added rigs back into the field. Aside from a single week in October, the US oil industry has deployed more rigs in every week dating back to June, a remarkable run that has resulted in more than 200 fresh rigs drilling for oil. The gains in the rig count come even as oil prices have held steady in the mid to low US$50s per barrel.

At the start of 2017, there are two major dynamics at play occurring at the same time, each pushing the market in opposite directions. The Opec deal is slated to take oil off the market, while US drilling is expected to add new supply. The pace and magnitude of each trend will ultimately drive oil prices one way or the other.