Oil Prices Gain More Than 3%; Drop in U.S. Drilling Activity Will Balance Oversupplied Market

Wall Street Journal ^ | Feb. 3, 2015 | GEORGI KANTCHEV

[thackney]

Oil prices continued their rally Tuesday as investors bet that a sharp decline in U.S. drilling activity will balance the oversupplied global market, and even as analysts cautioned that the rebound in prices may not prove to be sustainable.

Front-month Brent crude, the global oil benchmark, rose 3.7% to be at $56.80 a barrel on London’s ICE futures exchange. On the New York Mercantile Exchange, light, sweet crude futures for delivery in March recently traded at $51.15 a barrel, up more than 3% from Monday’s settlement.

Both the global oil benchmarks have gained more than 11% over the past three sessions after data last week showed the number of oil-drilling rigs in the U.S. fell to its lowest in three years.

Gareth Lewis-Davies, an analyst at BNP Paribas , said investors are encouraged by the U.S. rigs data, which suggests cuts in production would follow.

But as the lag between falling rig counts and falling output is up to nine months, the rally may not be sustained, Mr. Lewis-Davies said. What is more, global supply is still exceeding demand and crude-oil stocks will continue to build for some time, he said.

“People are trying to catch a falling knife,” Mr. Lewis-Davies said. “Investors are trying to buy ahead of the upturn in physical balances being afraid not to miss the boat.”

A weaker U.S. dollar is also supportive for oil, which is priced in dollars and becomes more expensive for holders of foreign currency when the dollar appreciates. The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, was down 0.07% on Tuesday.

RBC Capital Markets said prices could grind lower into the second quarter until evidence mounts that a deceleration of non-OPEC supply growth is taking shape....

[wolfman23601]

Likely a temporary bump due to the gauntlet of Northeastern blizzards. Most people in that region have oil heat.

[smokingfrog]

Gonna fill my tank today before the price shoots through the roof.

[thackney]

I would guess the blizzard shut down more gasoline consumption than the rise in heat oil consumption.

[wolfman23601]

Perhaps in the real world (I really don’t know), but weather events always spark speculation. In fact, if you look at the oil markets over the last 20 years, you’ll see that other than the financial crisis in 2008, oil never recovered from Hurricanes Katrina and Rita until now.

[rwh]

The drop in the rig count was a massive one and I imagine we will see a few more weeks of similar numbers. This as well as E&P companies slashing their capital spending will indeed affect future supply. Short term we will more than likely see more record gains. For the industry it is nice to see what appears to be a floor forming and investors look eager to send oil higher with any news that dampens supply.