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Oil’s Uncertain Comeback

Unless there is a notable geopolitical shock, traditional oil producers should treat the recent oil-price gains as a temporary windfall, not a permanent state of affairs. To prolong the price recovery as long as possible, they should reinforce their collective production discipline.

CALGARY – As global economic growth picks up practically everywhere, oil producers are becoming increasingly hopeful that the recent impressive price recovery will continue. But, if those hopes are to be fulfilled, not only will producers have to control what they can (by maintaining production discipline); what lies beyond their control (output from shale and the value of the dollar) will also have to work in their favor.

Just over three years ago, oil (WTI) was trading above $100 per barrel. But, by early 2016, prices had plummeted to around $30 per barrel, owing to a combination of sluggish demand, alternative supply (particularly shale oil and gas from the United States), and a new OPEC production paradigm under which the cartel, led by Saudi Arabia, withdrew from acting as a “swing producer.”

In the wake of the resulting collapse of export receipts and budget revenues, OPEC adopted a new approach, based on a modernized production agreement with two key features: greater flexibility for countries facing especially complex internal conditions (such as Libya) and the inclusion of non-OPEC producers, particularly Russia. Together, OPEC and non-OPEC countries established a floor from which oil prices could bounce. With the pickup in global growth and the emergence of geopolitical uncertainties (which could constrain output in some oil-producing countries), oil prices have rebounded to above $60 per barrel.

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