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OPEC pact to limit oil supply likely to continue, but demand increase crucial

Recent attempts to limit supply of oil may have temporarily boosted prices, building up a case for such efforts to be continued, but an increase in demand is needed to support a bull case for oil, an analyst told CNBC on Monday.

This viewpoint comes after a committee of ministers from the Organization of Petroleum Exporting Countries (OPEC), alongside non-OPEC nations, agreed to review whether or not they should extend a pact to limit oil supply for an additional six months, according to a statement made on Sunday.

That news lifted both Brent and WTI in early Asia trade.

Regional director of oil content at S&P Global Platts, Alan Bannister, said on CNBC’s “Squawk Box” that the positive impact on prices from the current pact means it is likely to be extended.

“Admittedly, (the current agreement came) at the cost of some member countries to reduce the amount of crude oil they can sell, but I think they will be broadly satisfied that the agreement they came to and the steps they’re taking are leading to a higher price than would have been the case otherwise,” he said.

However, an increase in domestic production within the U.S and an increase in shale production could continue to impede efforts to support oil prices. In order for prices to grow higher, demand must increase, Bannister said.

“We’re seeing that to a point. The case for an increase in demand in emerging markets is strong, particularly with rising sales of new vehicles and two-wheelers,” he said.

OPEC, alongside 11 other leading producers including Russia, agreed to cut output by a combined 1.8 million barrels per day for six months starting January of this year. The committee said in its Sunday statement that is pleased with the level of conformity so far.

Article written by HEI contributor Lydia Ezeakor.

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