Things are looking up in the global oil market. The market is rebalancing and oil prices are rising. Pushed up by protests in Iran, supply cuts by OPEC and Russia, and the return to full operations of the Forties pipeline system in the North Sea, oil prices posted their strongest opening to a year since 2014.

U.S. crude stockpiles have also dropped by around one fifth since their peak in March and ended 2017 at their lowest level since October 2015. According to the EIA, just last week, U.S. stockpiles dropped by 4.6 million barrels, more than analysts’ expectations, and the American Petroleum Institute said stockpiles fell by 6 million barrels.

China has also cut its state-owned stockpile. After taking advantage of low oil prices, according to data published by its National Energy Administration (NEA), China increased its Strategic Petroleum Reserve (SPR) by almost 14% between June 2016 and June 2017. By mid-2017 it had stockpiled 37.73 million tons of oil, equal to 275 million barrels, in nine bases, up from 33.25 million tons at end-June 2016. But as oil prices increased in the latter half of the year, China eased off this stockpiling activity.

Demand is also likely to rise in 2018, at least in the short term. Combined with low inflation, global GDP is rising. According to the International Monetary Fund the global upswing in economic activity is strengthening, with global growth projected to rise to 3.7% in 2018 with broad-based upward revisions in the euro area, Japan, emerging Asia, emerging Europe, and Russia.

But against this backdrop of rising prices and falling oil gluts there are signs that the price rises won’t last and we may well be looking at a sustained period of falls.

OPEC is committed to clearing the global oil gut. But for how long? Stockpiles are already falling fast worldwide. If stocks clear sooner than expected the pressure will be on OPEC to cancel production cuts early. It’s likely that the market will have fully rebalanced by mid-2018, fast-forwarding OPEC’s exit from production cuts to the second half of the year, according to Goldman Sachs.

President Vladimir Putin has gone on record and committed Russia to another six months of cuts at the very least. But once stocks reduce, Russia will be the first to apply pressure on OPEC; pressure they will find it difficult to fight off. At that point, China may well also ramp up production to match.

Russian-Chinese oil partnerships have been on the rise and on 1 January a second line for the China-Russia oil pipeline began commercial operation. The line, which begins at the Russian town of Skovorodino, running through Mohe, which borders Russia, to the city of Daqing in northeast China’s Heilongjiang Province, will raise China’s annual imports of Russian crude oil from 15 million to 30 million tonnes annually through the pipeline.

Built in parallel to the existing pipeline, the Chinese state has announced that the line’s intention is to deepen energy cooperation between China and Russia and serve the China-proposed Belt and Road Initiative.

Meanwhile, U.S. production is still rising. Crude production in October rose to the highest in more than 46 years, according to the latest figures available from the EIA, and there are few signs of significant reductions since then. Some people are also looking at alternative sources of energy. In North Dakota, oil output rose by 83,000 bpd in October, and jumped 206,000 bpd in Texas. Crude exports rose to 1.73 million bpd in October compared with 1.47 million bpd in September.

For now, OPEC members are sticking with the production quotas. But Russia is unlikely to sit idly by on reduced production while U.S. exporters grab market share.

Although the quotas are slated to last until the end of 2018, most analysts know that the real test comes in June when talks will start over the unwinding deal. If OPEC loses control at that point, which is quite possible, the market could suddenly be flooded with cheap oil.

There is still too much oil in the global system and too much production capacity. Coupled with increasing technological advances, a pro-oil President in the White House and a surge in global demand, how long will Russia hold back from starting an oil race with the U.S.?

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