Oil's Current Surge Toward $70 Seen Dragging It Down Later

(Bloomberg) -- Oil bulls, beware of higher prices.

While crude may climb to $70 a barrel next year as OPEC and its allies including Russia continue their output curbs, there are dangers ahead, according to a veteran analyst. U.S. West Texas Intermediate oil at $60 will encourage hedging and spur shale producers to boost production by as much as 1.5 million barrels a day in the second half of 2018, leading to lower prices in 2019, said Fereidun Fesharaki, chairman of industry consultant FGE.

“Indeed, higher prices can lead to substantially lower prices,” he said.

Stronger crude may also weaken the discipline of the Organization of Petroleum Exporting Countries and allies that are curbing production as part of a pact to shrink a global glut, according to Fesharaki. OPEC has at least 2.5 million barrels a day of spare capacity, and Russia can “immediately” put as much as 500,000 barrels a day in the market, he said.

“OPEC is good at holding the line when oil prices are low, but when prices are strong, the discipline can break down both in OPEC and non-OPEC,” Fesharaki said, adding that the “sustainable” price range is for global benchmark Brent crude to be at $50-$55 a barrel. “But can OPEC and Russia resist temptation and keep oil prices in this range?”

Brent futures were up 10 cents at $63.79 a barrel at 10:05 a.m. in London, up 22 percent since the end of August. U.S. marker WTI was at $57.13.

To contact the reporter on this story: Sharon Cho in Singapore at ccho28@bloomberg.net.

To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net, Ovais Subhani

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