The price of oil has doubled in a year. Here’s why

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It’s a good day for OPEC.

Data released by the oil cartel on Monday showed its members have largely complied with an agreement to cut output.

The confirmation caps a remarkable year for OPEC, which was forced to come up with a plan to raise prices after they fell to $26 a barrel in February 2016.

The collapse in prices, to levels not seen since 2003, was caused by months of growing oversupply, slowing demand from China and the decision by Western powers to lift Iran’s nuclear sanctions.

Since then, the market has seen an impressive turnaround, with crude oil prices doubling to $53.50 a barrel.

Here’s how major oil producers worked together to drive up prices:

OPEC agreement

OPEC agreed to major production cuts in November, hoping to rein in a global oil oversupply and keep prices steady.

News of the deal immediately sent prices up 9%.

Investors cheered further after several non-OPEC producers, including Russia, Mexico and Kazakhstan, joined the effort to curb supply.

Crucially, the agreement has remained. The OPEC report released on Monday showed that its members have, for the most part, kept their pledges to cut production. The International Energy Agency agrees: it estimated OPEC compliance for January at 90%.

UAE Energy Minister Suhail Al Mazrouei told CNNMoney on Monday that the results were even better than he had expected.

The production cuts total 1.8 million barrels per day and are expected to last for six months.

Related: OPEC has achieved one of its ‘deepest’ production cuts.

Optimistic investors

The OPEC deal took months to negotiate, and investors really, really like it. According to OPEC, the number of hedge funds and other institutional investors betting on higher prices hit a record in January.

Widespread optimism is helping fuel prices rise.

Greater demand

The latest data from OPEC and the IEA show that global oil demand was higher than expected in 2016, thanks to stronger economic growth, bigger vehicle sales and colder-than-expected weather ‘waited during the last quarter of the year.

Demand will increase further in 2017 to an average of 95.8 million barrels per day, compared to 94.6 million barrels per day in 2016.

The IEA said that if OPEC sticks to its deal, the global oil glut that has plagued markets for three years will finally disappear in 2017.

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What’s next?

Despite the impressive growth, analysts warn that prices may not rise much.

That’s because higher oil prices are likely to draw US shale producers into the market. The total number of active oil rigs in the US was 591 last week, according to data from Baker Hughes. That’s 152 more than a year ago.

According to the OPEC report, US crude stockpiles rose in January to nearly 200 million barrels above their five-year average.

“This large increase in inventories is the result of a strong supply response from US shale producers, who were not involved in the OPEC deal and have instead been using the rise in resulting prices to increase output,” said City Index analyst Fiona Cincotta.

More supply could put pressure on OPEC again.

CNNMoney (London) First published February 13, 2017: 9:13 am ET

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