Oil Prices Soar Amid Lower U.S. Output Estimates, OPEC Article

U.S. and global benchmarks enter bull markets as OPEC says it ‘stands ready to talk to all other producers’

Oil prices soared Monday, marking their strongest three-day rally since Iraq’s 1990 invasion of Kuwait, on doubts the global glut of crude would be as long-lasting as many investors and traders had earlier believed.

Precipitating the rally—crude rose 27% in three sessions—were several factors, including a downward revision of U.S. oil output and a report that sparked speculation the Organization of the Petroleum Exporting Countries may be considering cutting production.

On Monday, the U.S. Energy Information Administration said U.S. oil production this year was lower than previously estimated. The newly released federal data confirmed that U.S. oil output has taken a hit from falling oil prices, as new investments have proven unprofitable and some companies have struggled to stay afloat.

The number of rigs drilling for oil in the U.S. has dropped by 58% since October, though companies added back a few rigs in recent weeks, according to oil-field-services company Baker Hughes Inc.

The EIA cut its estimates for production in the first five months of the year after changing the way it gathers its survey data. Production averaged 9.4 million barrels a day from January to May, the EIA said, down from its prior estimate of 9.5 million barrels a day. In addition, the EIA said June production fell by 100,000 barrels a day from the prior month. The newest report is the first to incorporate some data gathered directly from companies, in addition to data from state agencies.

A major driver behind the three-day rally, the biggest in percentage terms in 25 years, was the number of investors who had adopted the market consensus and had wagered oil would plumb new lows amid a persistent global glut, analysts and traders said.

Once prices began to move higher, investors scrambled to buy oil to stem losses on bearish bets. That rush propelled a rally that put both the U.S. and global oil benchmarks into bull-market territory Monday, defined as a 20% gain from a recent low.

The unexpected spike in oil prices is the latest example of the big swings that have rippled through financial markets in recent weeks.

The combination of rising production and tepid demand sent oil prices plunging to six-year lows last week. Many market watchers don’t expect prices to recover until late 2016 or 2017, due to resilient production by the U.S. and OPEC and lackluster global economic growth. The U.S. benchmark recently dipped below $40 a barrel for the first time since 2009.

But on Monday, the U.S. crude-oil benchmark jumped $3.98, or 8.8%, to $49.20 a barrel on the New York Mercantile Exchange, the highest price since July 21. Prices are up 29% from their Aug. 24 low.

OPEC said in a publication released Monday that it “stands ready to talk to all other producers.” The report boosted expectations that the cartel, which has increased production to multiyear highs in recent months despite plunging oil prices, might change its stance and be willing to cut output.

The OPEC statement “does raise hopes that maybe the cartel’s changing its mind,” said Bill O’Grady, chief market strategist at Confluence Investment Management, which oversees $3.5 billion. But usually such huge moves are driven by tangible shifts in the supply-and-demand outlook, Mr. O’Grady added. “It troubles me in that you’re getting this kind of behavior on pretty flimsy evidence.”

The price surge for oil erased August losses, with crude posting a 4.4% gain for the month.

Some trend-focused traders, who make wagers that take advantage of large market moves in one direction, closed out bets on lower prices in recent trading sessions as prices climbed.

Abraham Trading Co., which manages $270 million, said it took off some of its wagers on lower oil prices Friday, and some of its shorter-term models added bets that prices would rise. The firm’s longer-term models are still wagering that prices will fall.

“In the next week or two, we’ll be more anxious to get out if it stays up at these levels,” said Salem Abraham, president of the Canadian, Texas, firm, referring to losses on the long-term bearish bets.

In recent weeks, money managers, including hedge funds, have held an unusually high number of bets that U.S. oil prices would fall, according to the Commodity Futures Trading Commission. Some analysts said that positioning made the market vulnerable to a snap higher.

“Prices up 27% since last Wednesday—that just doesn’t make any sense, bottom line,” said Stephen Schork, editor of industry newsletter the Schork Report, noting that the market remains oversupplied. “There is just panic in the street right now.”

OPEC’s battle for global market share is one of the big reasons the price of oil is still down 49% from a year ago. Few market experts believe the group, which has continued to ramp up output despite plunging prices, will change its tactics soon.

The oil cartel isn’t scheduled to meet until Dec. 4. Previous attempts in the past year to discuss cooperation between OPEC and non-OPEC producers have brought no results. However, a Kremlin aide said Monday that Russian President Vladimir Putin will discuss “possible mutual steps” to stabilize the global price of oil at a meeting with Venezuelan President Nicolás Maduro in China on Thursday. Venezuela is a member of OPEC, while Russia isn’t.

OPEC’s statement that it “stands ready to talk” didn’t specify any timing or location for a dialogue with other producers and didn’t indicate what it saw as a fair price. Iran’s oil minister Bijan Zanganeh said Saturday there was a consensus within the group that $80 a barrel was an equitable price, echoing a target previously given by Iraq and Venezuela.

Many analysts argue that oil prices still need to stay low for an extended period to force more production cutbacks in the U.S. and elsewhere.

Companies including Marathon Oil Corp., Apache Corp. and Anadarko Petroleum Corp. were among those that have announced steep spending cuts. Those cutbacks appear to be reining in oil output in Texas, where production had been growing rapidly during the first few months of the year.

Some analysts want to see more evidence that U.S. production is declining. Citigroup analysts said the EIA report “should be treated with caution,” because the new surveying methods are “untested and difficult to call reliable.”

By Nicole Friedman

Source: Wall Street Journal