Oil to not see any runaway rally in short term, prices to remain capped at $60

Oil prices witnessed extremely choppy trading last week with WTI prices dipping below $55 at one point and then recovering sharply by the end of the week. Some amount of profit-taking was expected after the sharp price rally of the last few weeks, but doubts remain about WTI prices sustaining above $60.

The Opec meeting at the end of this month will be crucial from that perspective, as it will either vindicate the bulls or lead to a cool off in prices. We believe while the fundamentals favour higher prices over a medium term, excessive rallies in the short term could encourage shale producers to start drilling aggressively and keep prices capped.

The key question for oil markets now is whether Opec will continue with its supply cuts in light of rising US output. The US oil production is near a record 9.64 mbpd and the price rally in the last couple of months could encourage further output from shale producers. This is likely to act as a cap to prices whenever they surge too fast.