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Why This Oil Price Rally Has A Limit

Why This Oil Price Rally Has A Limit

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Higher Oil Price Pushes UK Inflation To Two-Year High

Fuel Pumps

Inflation in the UK in January rose at the fastest rate since June 2014 on the back of higher oil prices resulting from the OPEC-non-OPEC agreement to cut output. This increase led to higher fuel prices on the local market and was coupled with the depreciation of the pound after Brexit, which, the Bank of England said in its latest report, is now being passed on to consumers.

At the same time, deflationary pressures from food prices have slowed down, supporting near-term projections by the central bank that inflation will continue to rise over the first quarter of this year, first reaching and then likely surpassing the target of 2 percent for the period. Higher crude oil prices will continue to be instrumental in these developments.

The consumer price rise figure for January, as supplied by the Office for National Statistics, was 1.8 percent, versus 1.6 percent in December. Going forward, according to the Bank of England, inflation could reach 2.7 percent within 12 months, as the UK’s exit from the European Union is bound to make imported products costlier.

On the positive side, the upward potential for oil prices has so far proved to be limited, despite optimistic updates coming from the OPEC camp: earlier this month, the IEA praised the cartel for achieving a 90-percent compliance rate just one month into the six-month agreement.

Related: OPEC Reports First Output Deal Results: 890,000 Bpd Cut

Yesterday, the Oil Minister of Kuwait said that non-OPEC producers participating in the cut have achieved a compliance rate of 50 percent. However, markets have failed to react to the news with much enthusiasm, and Brent and WTI kept their distance from the US$60 mark.

It seems it would take hard evidence to prove that the global supply of crude oil is dwindling enough to motivate a higher price for the commodity. With U.S. producers continuing to increase output, however, this evidence is unlikely to emerge in the coming months.

By Irina Slav for Oilprice.com

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