Maybe the surge in U.S. shale production won’t kill off the oil price rally after all.

Oil prices could rise as high as the mid-$60s per barrel by the end of the year, according to a new analysis from Citigroup. That even takes into account the ongoing rebound in U.S. shale production.

U.S. oil production is up nearly 700,000 bpd from a low point in the third quarter of 2016, with total output now up to more than 9.2 million barrels per day. But the shale industry is just getting started. Some of those gains came from offshore projects in the Gulf of Mexico that were in the works for a long time.

Meanwhile, the rig count in the Permian basin has been rising, but because production data shows up on a several month lag compared to the rig count, further gains in output are surely forthcoming. In fact, the EIA said in its April Drilling Productivity Report that U.S. shale production will surge by an additional 124,000 bpd in May compared to April. More than half of those gains – 76,000 bpd – will come from the Permian Basin, where most of the action is happening today. The Eagle Ford will also add a meaningful 39,000 bpd in May.

But the swift rebound of U.S. shale has not scared away the bulls at Citi. The investment bank acknowledged that U.S. shale will come “roaring back” this year, but pointed to OPEC as the reason for its optimism. "With a continuation of the OPEC/non-OPEC producer deal in the second half of 2017 and the expected associated inventory draw-down, we expect oil prices to move above $60 a barrel by the second half of the year," Citi analysts said in a note published Monday. Related: Putin’s Plan In The South China Sea

Citi also acknowledged that bullishness earlier this year was probably a bit too much too soon, but that the second half of this year will probably exhibit more market tightness. "Commodities stumbled through the first quarter following what was clearly the healthiest year for the sector since the decade began. In retrospect, part of the sell-off toward the end of the last quarter was too much froth in critical subsectors like oil, copper and iron ore. But signs of better performance are increasingly clear, despite major risks," Citi analysts said. The OPEC cuts will tip the global supply/demand balance into a deficit, which will drain inventories for the remainder of the year.

To be sure, Citi has downgraded its pricing forecast – in February it called for oil to hit $70 per barrel before the year was out. And crucially, it also warned that its mid-$60s forecast would go out the window if OPEC failed to extend its production cuts. If OPEC let its deal expire in June and returned to higher levels of production, oil prices would head “precipitously lower.”

But a growing number of analysts are assuming that won’t happen, especially since Saudi officials recently expressed support for an extension of the cuts for another six months, even as they stated that no decision will be made before OPEC’s meeting in late May. Related: Reeling From Low Oil Prices, Saudis Look To Freeze Megaprojects

If OPEC extends, then oil could gain as much as $10 per barrel this year, Citi analysts say. Citi, along with fellow investment bank Goldman Sachs, have been undaunted by the rapid comeback of U.S. shale. They have maintained a case for higher oil prices this year, even through the March selloff that took WTI back down into the mid-$40s. They stuck to their bullish forecast, even as the market grew skittish. Sure enough, oil quickly rebounded back to the mid-$50s. On April 12, Goldman published a research note, calling for “more patience” and noting that oil inventory drawdowns were not expected until the second quarter anyway.

In the short run, much will hinge on the slightest murmurings from OPEC. Oil could dip in the lead up to the OPEC meeting in May if resolve from the group appears to be faltering. But if they extend their cuts, as many expect, oil could finally move above $60 per barrel in the second half of 2017.

By Nick Cunningham of Oilprice.com

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