Brent, the international oil benchmark, rose above $40 for the first time in three months during early trading as markets factor in an extension of production cuts by members of the Opec+ alliance.
Brent was up as high as $40.42 before declining 1.39 per cent to trade at $39.02 per barrel, while West Texas Intermediate, the key US gauge, was also at a three-month high, but slipped 0.76 per cent to $36.53 per barrel at 2.32pm UAE time.
Prices rose earlier on reports that suggested Russia may agree to a one-month rollover of a historic pact to draw down more than 9.7 million barrels per day from the markets.
Oil producers have been cutting back at record levels in May and June, with the restrictions set to taper off at the end of the month. Saudi Arabia has been pushing for a one to three month extension at current levels, according to reports.
The producers, who were initially set for a meeting on June 9, may hold their virtual conference on June 4 and 5. However, no official announcement has been made yet.
"The North American oil producers must be breathing a collective sigh of relief. Oil prices surged beyond $40 per barrel as the petro-nations mull a supply cut extension and as futures contracts have rolled over," said Norbert Ruecker, economics & next generation research head at Julius Baer.
The supply glut in the markets looks seemingly "less frightening" than initially feared as demand rebounded swiftly and the supplies were cut meaningfully, he added. The bank expects oil inventories to peak out below capacity levels and begin to dwindle globally over the coming weeks.
Prices also gained as industry-funded American Petroleum Institute reported a decline in US crude stocks. Inventory levels at WTI physical delivery point in Cushing, Oklahoma, are estimated to have fallen by 2.2 million barrels last week, marking the fourth consecutive week of declines.
“Opec+ looks set on extending its deeper cuts by at least an additional month, helping to prop up the bottom of the market,” said Timothy Fox, research head and chief economist at Emirates NBD.
Oil’s gains come as markets stabilise and become more rebalanced following a demand crunch caused by the coronavirus pandemic. Prices declined 60 per cent in April from their January peak, in the bleakest month for markets, as countries remained under lockdown. WTI fell below zero to briefly trade at -$40 in April as storage capacity at Cushing dwindled.
The oil markets gave up their earlier gains later in the day on Wednesday as traders questioned whether Opec+ would meet on June 4 amid media speculation that Saudi Arabia and Russia were demanding stronger compliance from producers.
Compliance among the group averaged 86 per cent in May, according to Energy Intelligence, with West African producers falling below 50 per cent in cutting back according to their quotas.
Nigeria, a key West African producer, as well as Opec's second-largest producer Iraq, were singled out for lack of compliance, according to reports.
Gulf members of the Opec+ alliance, led by Saudi Arabia are cutting more than their quota as they look to rebalance the markets sooner.
Saudi Arabia is cutting a further 1 million bpd of supply from the markets in June, bringing its total output curbs to 4.8m bpd. Production for the month of June for the world's largest oil exporter is expected to average 7.492m bpd.
Kuwait will also cut an additional 80,000 bpd, while the UAE is committed to further reductions of 100,000 bpd.
Russian production also remained above its quota level at 8.6m bpd, according to Russian energy ministry data.
"This just slightly overshoots their target under the existing Opec+ production cut agreement, whilst we are expecting compliance to remain high this month also," JBC Energy said.
Total supply including condensate meanwhile was closer to 9.4m bpd, a month-on-month reduction in combined output of a little over 2m bpd, the report added.