Talk of output cuts, high volume and technical trade support prices
Oil futures soared on Friday. West Texas Intermediate crude registered its best one-day percentage gain in about seven years.
On Friday, WTI crude for March delivery CLH6, +10.72% jumped by $3.23, or 12.3%, to settle at $29.44 a barrel on the New York Mercantile Exchange, rebounding from a nearly 13-year low a day earlier. Prices, based on the most-active contracts, haven’t settled with percentage gain that high since January of 2009, according to FactSet data. April Brent crude LCOJ6, +8.62% also gained $3.30, or 11%, to end at $33.36 a barrel.
So what was behind the latest move? Analysts offered 4 key reasons:
1). A renewed possibility of coordinated production cuts
United Arab Emirates Energy Minister Suhail al-Mazrouei said that members of the Organization of the Petroleum Exporting Countries are ready to cooperate on a cut in crude production, The Wall Street Journal reported late Thursday.
The market is taking the comments from the U.A.E. minister “seriously because the U.A.E. is doing an about face,” said Phil Flynn, senior market analyst at Price Futures Group. The country was “saying a month ago a cut was going to be over their dead body basically,” said Flynn. “Well, maybe hell froze over.”
Venezuela, meanwhile, proposed that OPEC and non-OPEC producers should at least freeze output at the current level.
But even if global production freezes at current levels, the storage crisis for oil won’t be resolved, said Richard Hastings, a macro strategist at Seaport Global Securities.
If, instead, OPEC reduces production from 32.3 million barrels a day to 31.5 million barrels a day, then “this fixes the problem quite a bit more,” said Hastings.
But why would the OPEC leadership do that “when they believe the upcoming storage crisis would achieve the same outcome, without any pain to their biggest members like Saudi Arabia and Iraq?” he said. “Without confirmation of a production cut—and we mean immediately—then this rally should not [be] followed upon.”
2). Signs of falling production
The market has seen some signs that the low prices for oil are causing producers to cutback on output.
“Although only a small loss of 4,800 [barrels a day], the first closure of a Norwegian oil field—the Varg oil deposit—in the North Sea is evidence that OPEC’s tactic of trying to flush out higher-cost production is starting to work,” said Matt Smith, director of commodity research at ClipperData.
Meanwhile, reports from the U.S. Energy Information Administration this month have shown weekly declines in total U.S. crude output and expectations for a fall in March oil production from seven major domestic shale plays.
On Friday, data from Baker Hughes Inc. BHI, +0.30% showed that the number of active U.S. rigs drilling for oil fell for an eighth week in a row. The oil-rig count was down 28 to 439.
Oil companies have also shown obvious signs that they’re suffering from the price rout. Earlier this month, Royal Dutch Shell RDS.A, +3.77% RDS.B, +3.87% said low oil prices forced it to slash 1.4 billion barrels from the volume of oil and gas it expects to develop.
3). Technical rebound
Oil prices have managed to climb above price resistance levels.
“Both contracts have turned higher from key technical level, with Brent holding its own above the psychological level of $30 which is also the 61.8% Fibonacci retracement of the most recent upswing,” said Fawad Razaqzada, technical analyst at Forex.com.
“At this stage, it should be treated as just a technical oversold rebound, but if we create new highs above the recent range then that would confirm a change in the trend.”
Similarly, Naeem Aslam, chief market analyst at AvaTrade, said that the resistance of $31.50 is the primary headwind for WTI oil.
A close above the $30 mark will “signal that the bulls are back in control of the price,” he said.
Still, Aslam was wary. “The drop will be as significant as the surge is—that is all [that] traders need to keep in mind,” he said.
4). High volume
The high volume of contracts traded on the Nymex recently has made prices much more volatile, exaggerating the moves either up or down for oil.
WTI crude has set volume records on Nymex in each of the past three sessions, according to Tim Evans, energy analyst at Citi Futures and OTC Clearing. “We see this heavy trade as certainly contributing something to the price volatility.”
The CME Group said Wednesday that trading volume for WTI crude on Tuesday was at about 1.603 million contracts, compared with a previous record of nearly 1.595 million contracts on Dec. 8, 2015.