Oil prices up over 1.5% as the end of the year approaches

Both international and U.S. crude benchmarks were up over 1.5% Tuesday as oil prices continue to rally and 2016 draws to a close. U.S. crude oil prices have surged more than 25% since mid-November following the announcement that OPEC plans to cut production by roughly 1.2 MMBOPD starting January of 2017.

Trading was thin Tuesday following the holiday weekend, with less than one-third of the usual trading volume. The one-month futures contract on WTI was up more than $0.80 per barrel today, putting it just below $54 per barrel, and near the year’s high of $54.51 reached on December 12.

“Some of the doubts (in OPEC) people are showing are going to have to be put to rest,” Phil Flynn, analyst at Price Futures Group, told Reuters. “There’s a strong possibility that we’re going to rally into the end of the year.”

WTI one-month crude oil price ended Dec 27, 2016

Source: Bloomberg. WTI cude oil one-month price chart ended Dec. 27, 2016

OPEC wary of raising prices to $60 per barrel

The spike in oil prices brought about by OPEC’s decision to cut production carries a risk for the group as well. The IMF believes OPEC would need Brent crude to average $62 per barrel in 2017 for all of its members to balance their books, but the group may not be willing to send prices that high and risk increased production in the United States.

When oil prices cratered from over $100 per barrel to below $30, many shale producers in the U.S. were forced to streamline operations, making them more efficient. Now that prices are beginning to recover, OPEC runs the risk of restarting the U.S. shale machine that contributed to oversupplied markets in the first place.

At 8.8 million barrels a day, the U.S. is already pumping almost as much crude as two years ago, with just a third of the rigs it operated at the peak, data from Baker Hughes Inc. and the Energy Information Administration show. Since May, drillers have added about 200 rigs, taking advantage of rising prices as talk of an OPEC supply cut circulated.

A bigger boost in prices could mean a million-barrel shale surge from the U.S., Macquarie Research analysts Vikas Dwivedi and Walt Chancellor noted in a December 12 report to clients.

Members of the OPEC production deal could also undermine the agreement

Many are concerned that OPEC’s production deal may sink due to its own members, however. Members of the group “tend to cheat,” former Saudi oil minister Ali Al-Naimi said in a December 2 speech, before the agreement between OPEC and non-members was finalized. And even if the group does follow through with the deal, Nigeria and Libya, which were both granted exemptions, could push OPEC over its production quota.

Both Nigeria and Libya are currently producing well below capacity as they deal with militant attacks on oil infrastructure and a civil war, respectively. If each country was able to produce near its full capacity in 2017, the two would effectively wipe out supply cuts from the other members, according to Bloomberg.

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