Oil prices going too high?

A sudden spike in crude prices threatens the OPEC-Russia oil deal

Last week, Brent oil prices stepped over the $70 level, which has become the highest figure since December 2014. Such a dramatic growth can be dangerous for the market as it is likely to cause a surge in the U.S. shale oil production, experts warn. As a result, OPEC and other producers may reconsider their strategy of keeping the cuts until the end of 2018.

The current oil prices recovery gives oil-producing economies much-needed relief, but it also presents them with troubling consequences, Bloomberg considers. At the beginning of January, Brent prices reached $70,05 per barrel due to output cuts by most oil-producing nations coupled with robust global demand. Numerous industry experts including the Iranian oil minister and OPEC's own analysts have already expressed their concerns about a potential surge in the U.S. shale production that can ruinall the progress.

''Getting too far above $70'' can both stimulate new supply and affect the economy, believes Jeff Currie, head of Commodities Research at Goldman Sachs.''There are many reasons they'd be concerned, but top of the list is: how will U.S. production respond,'' agrees Mike Wittner, head of Oil Research at Societe Generale SA in New York.

The U.S. shale drilling boom was one of the reasons for an oil surplus that caused a price crash in 2016. At the end of the year, OPEC and a group of non-OPEC nations headed by Russia assembled a coalition that would cut their own production. In the first half of 2017, global stocks remained excessive and prices depressed, but in the second half of the year stronger demand and several supply threats helped decrease the glut.

Coastal oil refinery in Texas, U.S. Photo: USFWS

However, higher prices are profitable not only for the deal's participants but also for the U.S. and Canada. The U.S. government estimates that the country's production could rise from 9.3 million bpd in 2017 to 11 million bpd in 2018 surpassing both Saudi and Russian output. At the same time, rising global demand will help to absorb some of the additional output. OPEC expects global consumption to increase by about 1,5 million bpd this year.

Earlier the cartel announced that it intends to restrain production for the rest of the year to reach the final market balance. The prices are now supposed to retreat due to a lull in seasonal demand. ''For now, with the price strength looking very temporary, I think OPEC will say we're on our way to getting the market rebalanced, and keep going,'' said Ed Morse, head of Commodities Research at Citigroup Inc., adding that the resolve might not last all year and the production could begin to recover over the summer. Saudi Arabia and Russia have repeatedly stressed that the production will revive gradually when the cuts come to an end.

By Anna Litvina