Oil caps longest rally this year as anxiety over oversupply eases

Cause to be confident amid signs of market rebalancing

West Texas Intermediate for August delivery gained $1.11 to settle at $46.04 on the New York Mercantile Exchange. Oil is down about 9 per cent this quarter. Reuters

Oil has posted the longest run of gains in six months after US shale explorers paused a record drilling expansion in a sign the boom may be slowing down.

Futures added as much as 2.7 per cent in New York on Friday, advancing for a seventh session. Shale explorers broke the longest stretch of uninterrupted growth in three decades as rigs targeting crude fell by two  last week, bringing the total to 756, according to Baker Hughes data reported on Friday. The rig count has more than doubled from a low of 316 in May.

While prices surged last week, oil in New York and London posted a loss in June -- a month in which prices typically gain. Crude futures tumbled into a bear market last week on concerns that rising global supply is offsetting cuts from Opec and its partners. Bank of America became the latest in a string of banks to cut its outlook for prices this year and next.

"I don’t think everyone’s quite ready to write off the Opec/non-Opec accord just yet," said John Kilduff, a partner at Again Capital, a New York-based hedge fund. "And given how far we’ve fallen, you’re seeing bargain hunting by some."

West Texas Intermediate for August delivery gained $1.11 to settle at $46.04 on the New York Mercantile Exchange. Oil is down about 9 per cent this quarter.

Brent for August settlement, which expires Friday, closed 50 cents higher at $47.92 per barrel on the London-based ICE Futures Europe exchange. The global benchmark is down about 9 per cent this quarter and traded at a premium of $1.85 to WTI.

The rig count drop follows a report  that US crude output fell by the most in almost a year last week amid field maintenance in Alaska and tropical storm Cindy, while petrol inventories fell for a second week. Opec and its partners are not worried about the market recovery and don't plan to discuss deeper cuts, said the UAE energy minister Suhail Al Mazrouei.

“There is cause to be confident that the long-awaited oil market rebalancing is fast approaching,” said Stephen Brennock, an analyst at PVM Oil Associates in London. “Doubts will linger over the staying power of this rally” and “several stumbling blocks still lie ahead of the price recovery”.

Bank of America lowered its 2017 WTI forecast to $47 and 2018 to $50, citing a continuing rise in oil output and disappointing demand. Prices will remain in contango, where near-term contracts are cheaper than long-dated ones, until year-end. Futures will only move into backwardation -- the inverse market structure that’s desired by Opec -- by next summer, the bank said.

* Bloomberg