Oil and LNG, page-32

Oil soars over 8% on lower US output

Oil prices soared in the latest session, marking their strongest three-day rally since Iraq's 1990 invasion of Kuwait, on doubts that the global glut of crude would be as long-lasting as many investors and traders had earlier believed.
The combination of rising production and tepid demand has sent oil prices plunging to six-year lows in recent months. Many market watchers don't expect prices to recover until late 2016 or 2017, due to resilient production by the US and the Organization of the Petroleum Exporting Countries and lacklustre global economic growth. The US benchmark dipped below $US40 a barrel last week for the first time since 2009.
On Monday, oil traders found reason to question some of their assumptions about the strength of worldwide production. Fresh US government statistics showed that the nation's oil output had been modestly overstated for much of the year.
An OPEC report sparked speculation the cartel was signalling a softer stance on output cuts, which No. 1 oil exporter Saudi Arabia has resisted. Russia hinted it could make moves aimed at stabilising prices. And a fire halted some output in Canada, the biggest foreign supplier to the US.
Both the US and global oil benchmarks entered bull markets Monday, defined as a 20 per cent gain from a recent low.


The unexpected surge in oil prices is the latest example of the volatility rippling through financial markets in the past several weeks. A large number of investors had been betting that oil prices would continue to fall even as the US benchmark dropped below $US40 a barrel last week. Once prices reversed, many may have been caught flat-footed and scrambled to buy futures to close money-losing positions, exacerbating the sharpness of the rally, analysts said.
October crude jumped $US3.98, or 8.8 per cent, to $US49.20 a barrel on the New York Mercantile Exchange, the highest price since July 21. Prices are up 29 per cent from their August 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 multi-year highs in recent months despite plunging oil prices, might change its stance and be willing to cut output.
"Now people don't know how to put a value on the price of oil," John Farley, portfolio manager at commodity-trading advisory firm Emil van Essen, said. "You have people thinking that we're going to go up to $US60, and then you have some people saying OPEC doesn't have that much power anyway. So they don't know what to do."
US prices have surged 27 per cent in three sessions, the biggest three-day percentage gain since August 1990, when Iraq invaded Kuwait. The contract erased its August losses, posting a 4.4 per cent gain for the month.
Brent, the global benchmark, rallied $US4.10, or 8.2 per cent, to $US54.15 a barrel on ICE Futures Europe, up 27 per cent from August 24. The contract rose 3.7 per cent this month.
Trading volumes were lower than usual because of a UK holiday.
OPEC isn't scheduled to meet until December 4 and has rebuffed previous calls for an emergency meeting. Previous attempts in the past 12 months to discuss cooperation between OPEC and non-OPEC producers have brought no results.
Separately, a Kremlin aide said Monday that Russian President Vladimir Putin will discuss "possible mutual steps" to stabilize the global price for oil at a meeting with Venezuelan President Nicolás Maduro in China on Thursday.
OPEC didn't specify any timing or location for a dialogue with other producers and didn't indicate what it saw as a fair price.
But Iran's oil minister, Bijan Zanganeh, said Saturday there was a consensus within the group that $US80 a barrel was an equitable price, echoing a target previously given by Iraq and Venezuela.
The drop in oil prices in the past year has harmed the economies of oil-producing nations, many of which depend on oil sales for a large portion of government revenue.
"The lower oil goes, and the longer it stays low, that could raise some tension in some countries," John Pickart, a portfolio manager of the Franklin Pelagos Commodities Strategy Fund, said. As of June 30, the fund had more money invested in energy than is recommended by the benchmark it tracks.
Money managers, including hedge funds, have held an unusually high number of bets that US oil prices would fall in recent weeks, according to the Commodity Futures Trading Commission. Some analysts said the positioning made the market vulnerable to a snap higher, as investors rushed to close out those wagers.
"Prices up 27 per cent since last Wednesday -- that just doesn't make any sense, bottom line," Stephen Schork, editor of industry newsletter the Schork Report, said, noting that the market remains oversupplied. "There is just panic in the street right now. ... Someone big is on the wrong side of this trade, and they're getting hammered."
Also on Monday, the US Energy Information Administration said that US oil production this year was lower than previously estimated. The newly released federal data confirmed that US oil output has taken a hit from lower oil prices, as new investments have proven uneconomic and some companies have struggled to stay afloat.
The EIA cut its estimates for production in the first five months of the year by between 40,000 and 130,000 barrels a day each month, due to new survey methodology. In addition, the EIA said that June production fell by 100,000 barrels a day to 9.3 million barrels a day, bringing total production in the first half of the year to 9.4 million barrels a day.
The updated data "will encourage more bottom-picking," as traders pile into the market in expectation that production will keep falling, according to Olivier Jakob, managing director of oil-advisory firm Petromatrix. "We went through a wave of [production] increase, but now this is starting to come to an end."
To be sure, many analysts argue that oil prices need to stay low for an extended period of time to force more production cutbacks in the US and elsewhere. A price spike could allow companies to lock in prices for future production, enabling them to keep output higher for longer.
"I really would want to see a reduction of supply in the marketplace in order to really start to think that we're getting a bottom," Jeffrey Sherman, portfolio manager at DoubleLine Capital, said.