Oil prices jumped eight per cent higher on yesterday, snapping a two-day rout, after investors took advantage of a weaker U.S. dollar and shrugged off data showing an unexpected large surge in US crude inventories to record highs.
Comments by Russia’s foreign minister reiterating the major producer’s willingness to meet if there was consensus among the OPEC and non-OPEC members, also reignited hopes of a deal to trim output and helped to boost prices.
The dollar index tumbled to an over seven-week low, making commodities priced in the greenback cheaper for holders of other currencies, amid growing skepticism that the Federal Reserve would be able to hike U.S. interest rates again this year and after data showed the US services industry grew more slowly than expected last month.
US crude futures closed with one its biggest gains in five months, rising US$2.40, or 8 per cent, to US$32.28. It was last up 8.5 per cent at US$32.42.
Brent futures settled up US$2.32, or 7.1 per cent, at US$35.04 a barrel, after rising as high as US$35.11. It was last up 7.43 per cent at US$35.15. US heating oil futures finished 6.7 per cent firmer after the US weather model called for seasonal cold over the next two weeks. “We’re getting the rally in crude oil from the pounding that the dollar is taking,” said Robert Yawger, senior vice president of energy futures at Mizuho Securities USA.
“There is a little bit of spec activity involved in that too. The market has a tendency as of late here to draw in spec position when we trade below $30,” he added. An employee of Stewarts Inc., an oilfield service company, work on a chemical drum at a drilling site in the Permian Basin oil field on January 20, 2016 in the oil town of Andrews, Texas.
Oil and stocks: An unhealthy relationship? In the last year, speculators had racked up the largest short, or bearish, position in crude oil in history and part of the current volatility in the price has come as a result of some of those positions being closed.
The markets shrugged off government data showing US crude and gasoline inventories rose to record levels last week. Crude soared 7.8 million barrels higher, topping analysts’ expectations for a rise of 4.8 million barrels, as imports jumped and refiners trimmed throughput.
“People say ‘I think the market has bottomed, there’s no place else to go but up from here’—I don’t agree with that premise. I think we will make new lows before we start moving up higher—there’s just so much oil out there you don’t know what to do with it,” Sal Umek of the Energy Management Institute in New York said. “The bears are controlling the market, the bulls are only going to go in and try to get a little bit here and there.”
Analysts reviewing the possibility of the deal are doubtful that such a meeting could take place, but argue Russia’s options for tackling it deteriorating economy are running out, as oil prices look to remain stubbornly low.
Chief markets economy at Capital Economics, John Higgins said the reports of a deal should at least be weighed, given that oil cartel OPEC’s largest producer, Saudi Arabia, and Russia both produce some 10 million barrels of oil per day, but remained unconvinced that “anything tangible will come of the latest calls for coordinated action.” “If the wealthier Gulf producers are tolerating lower prices to protect market share, there are already plenty of signs that this policy is working. The number of active drilling rigs in the US has collapsed and shale production there is now falling,” he said. “There would also be major questions over compliance. Even if Saudi Arabia were ready to change tack and agree to coordinated output cuts, it is not obvious that Russia would be a reliable partner,” he added.
Oil prices held onto gains despite the mixed messages on a possible deal, with Brent prices for April delivery up 99 cents, or 3 percent, at $33.69 a barrel in Wednesday afternoon trade, pulling away from a session low of $32.30. U.S. crude futures rose 81 cents to $30.71, off a session low of $29.40. Hints of a deal come as the Russian economy, along with other less stable oil producing nations, is under major strain with economists predicting further contraction in 2016.
“A second year of recession looks likely in 2016. Most growth indicators will continue to slide in and while there is expected to be an improvement in the second and third quarter, this will only be due to the base effect. Under our base-case scenario, the economy will remain in recession through the first half of 2016 and we may only see a return to growth in fourth quarter,” senior partner at macro advisory, Chris Weafer said.
US ratings agency Fitch said the Russian government has asked ministries to identify 700 billon rubles ($9 billion) of cuts, which will help with the deficit but will also likely dent demand in an economy weakened by lower oil prices and rouble volatility.
Brent crude prices have declined over 10 per cent this year, and down around 70 per cent over the last 18 months, hitting the budgets of oil-dependent nations, such as Nigeria and Azerbaijan, which have sought assistance from the International Monetary Fund.
“The Kremlin is now at a position where it has to choose between further spending cuts or drawing down its sovereign wealth funds, which may be more palatable given upcoming elections. With the Russian economy declining rapidly (by 3.7 percent in 2015), there are reports of small scale protests starting to occur, which President Putin will not want to gather momentum,” said chief oil analyst at Energy Aspects, Amrita Sen in a note.
Sen also noted that because Russian oil companies such as Lukoil, which have seen a growing proportion of their production become increasingly uneconomical, have begun to call for output cuts and co-operation with OPEC, there is little downside for Russia to suggest a production cut deal with the cartel.