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How oil clawed its way back to $50 – and what's next

Global crude prices briefly topped $50 (U.S.) a barrel on Thursday, breaching that threshold for the first time since last November and giving new hope to hard-pressed producers the glutted oil market will return to balance sooner than expected.

Both North Sea Brent and North America's trendsetting West Texas intermediate (WTI) rose above the $50 mark in early trading, but fell back as the day progressed and traders focused on increased gasoline inventories that could mean lower-than-anticipated demand for crude from refineries looking to meet summer driving needs. And analysts expect oil prices to remain volatile, with large price swings as traders react to the vagaries of a highly politicized market.

WTI settled down eight cents at $49.48 a barrel after reaching $50.21, its highest level since early October, while Brent peaked at $50.51, then retreated to $49.74 a barrel. "There should a period of consolidation [in the $45 to $50 range] but it's going to be choppy," Bart Melek, economist with TD Securities Inc., said Thursday.

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"This has happened a little quicker than we thought. … I suspect people are feeling a lot better about the supply-demand balance than they did two months ago."

While the current price is a considerable improvement from the January depths, it's hardly cause for celebration in the oil patch.

Two years ago, WTI traded above $104 a barrel, beginning its long decline in June as surging U.S. shale production contributed to a global glut. The plunge to a monthly average of just under $50 in January, 2015, was considered disastrous.

Here are the factors behind the recent price increase:


Restoring balance to oil markets

It's tough to predict whether crude prices will stay around $50 or retreat as more than one million barrels a day of Canadian production that was shut in from the Alberta wildfires come back on line. Internationally, Nigeria, Libya and Venezuela have all seen production outages, though Libya and Nigeria are expected to reverse those losses.

Most analysts expect crude prices to strengthen in the latter part of 2016 as non-OPEC production falls in response to two years of budget cuts by oil companies around the world, and growing demand sops up excess supply.

However, there are risks. Key members of the Organization of Petroleum Exporting Countries (OPEC) have increased production and some, notably Iran and Iraq, aim to go higher. U.S. shale producers may boost their drilling and production as prices creep back into the range where they can make money.

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False start in 2015

Some analysts warn crude will come under pressure again as temporary outages end and producers respond to the higher prices by putting more oil on the market. That happened last year: Prices plummeted in the winter of 2014-15 after Saudi Arabia made it clear at a November OPEC meeting that it would not cut production to support prices.

But oil prices recovered last spring as U.S. drilling activity plunged and private-sector companies around the world slashed their development budgets, including Canada's oil sands producers.

The rally petered out by mid-summer last year. Non-OPEC production proved to be more resilient than the market had anticipated. And the global economy showed signs of weakness with the slowing of the Chinese juggernaut that had supported commodities prices since the 2008-09 economic meltdown. By last fall, crude prices were swooning again.


Declining U.S. production

With the Saudis having abandoned the role of swing producers, that part seems to have fallen to U.S. shale producers, who respond more quickly to price changes than do companies who make multiyear investments in new oil sands or deep-water operations.

Because shale oil deposits have a fast depletion rate, producers have to drill aggressively to maintain production. In the first year of the slump, they kept up supply by focusing their activity in the most prolific areas.

Despite the price collapse, U.S. production continued to grow through the latter part of 2014 and first half of 2015, peaking at 9.6 million barrels a day. It has since fallen to 8.8 million barrels a day.

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Canadian production, in contrast, is expected to continue growing until 2019 as oil sands projects begun before the price slump are brought on stream.


Growing demand

It's Economics 101: When the price of a product falls, people will consume more of it. And so it's been with crude – although a slowdown in the global economy has moderated the demand growth. China and India remain strong sources of oil demand growth.

Meanwhile, U.S. gasoline consumption is booming and sales of SUVs, crossovers and pickups are leading North American auto markets. This weekend marks Memorial Day, the start of the U.S. summer holiday season. And with average pump prices in the United States at an 11-year low, American motorists will do their part to buoy global crude demand.

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