Oil near 3-year high despite United States output up

Brent crude breaks $70 a barrel level for first time since 2014

After lagging in 2017, the TSX continues to underperform to start the year, up just 0.6%, compared to 4%-to-5% for US indexes.

Later-dated futures trading lower than the spot price, known as backwardation, is expected to inhibit production because it implies a lower price for future barrels sold.

The Energy Information Administration predicts US crude prices will stabilize to about 55 dollars a barrel for West Texas Crude and 60 dollars a barrel for Brent Crude, with slightly higher prices for both in 2019.

The markets were strong throughout the week with WTI futures exceeding highs last seen on November 28, 2014, the day after OPEC's decision to cut production in an effort to trim the excess global supply and stabilize prices.

On the demand side of the price equation, the current cold snap in the United States has seen the countries refineries crank up production of distilates that include heating oil used in many USA homes.

Late in the week, prices received a boost after the United Arab Emirates' (UAE) oil minister hinted that an alliance between OPEC and non-OPEC producers, including Russian Federation, could continue in some way beyond their current deal to curb oil output. Oman, which is not an OPEC member, has been a staunch supporter of production cuts. And in the US, energy companies added 10 new rigs in the week ending January 12, bringing the total to 752 rigs, according to the energy firm, Baker Hughes.

That was the biggest increase since June 2017. Vienna-based consultancy JBC Energy is concerned over the increased US output.

Russia's Lukoil CEO Vagit Alekperov said Russian Federation should start to exit the pact if crude prices remain at $70/Bbl for more than six months, Kallanish Energy understands. "We see the USA complex as decidedly bearish over the next two months".

We expect the drilling numbers to continue to rise throughout the first quarter of 2018 or even longer if prices remain high. "I think we're probably in the process of topping out as we speak".

More particular to the Brent oil price, however, has been the recent shutdown of a pipeline in the North Sea Forties oil field operated by INEOS after the discovery of a crack. The rally will essentially stop when the hedge funds stop buying. The deal between OPEC and Russian Federation to cut 1.8 million barrels per day of crude, which started in January 2017, is due to last until the end of 2018. This may be the news that puts in the short-term top.

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