Oil's bounce from worst week in two years capped by shale fears

Rig working in the Permian. Image: Chevron Corporation

While oil is rebounding from its biggest weekly decline in two years, a surge in U.S. shale still looms over the market.

Futures in New York were up about 2 per cent after tumbling 9.6 per cent last week. Prices are near $60/bbl after data showed last Friday that American drillers raised the number of rigs exploring for oil to the highest since April 2015. That’s raising fears that a gain in U.S. output will undermine OPEC’s efforts to clear a glut. Hedge funds scaled back bets on rising West Texas Intermediate crude by the most since August.

Last week’s tumble reversed this year’s gains in crude, after a global equity rout spread to commodities and as the U.S. pumps record volumes. Meanwhile, a weaker dollar that had driven oil’s advance in January has been rebounding this month, cutting market support. American drillers remain the biggest challenge to the Organization of Petroleum Exporting Countries and its allies as they curtail output to prop up prices.

“Essentially what we see today is a reversal of Friday’s sell-off,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich. “The overshooting of prices in January has triggered a stronger supply response from U.S. frackers.”

WTI for March delivery added $1.01 to US$60.21/bbl on the New York Mercantile Exchange at 10:31 a.m. in London. The contract slid $6.25 last week to close at $59.20, the lowest level since Dec. 22. Total volume traded was about 55 per cent above the 100-day average.

Brent for April settlement was at US$63.74/bbl on the London-based ICE Futures Europe exchange, up 95 cents. Prices dropped $5.79, or 8.4 per cent, to settle at $62.79 last week. The global benchmark crude traded at a $3.75 premium to April WTI.

The U.S. oil rig count rose by 26, the most in a year, to 791 last week, Baker Hughes data showed on Friday. American weekly crude output topped 10 million bbls/d for the first time on record, and the government forecasts it will skyrocket to 11 million later this year. That means the U.S. is now a top producer of the same calibre as Saudi Arabia and Russia.

“The market will likely be reluctant to rebound too much as the sharp rise in the U.S. oil rig count on Friday has spurred some concerns over whether we will see a rapid increase in U.S. output,” said Jens Naervig Pedersen, an analyst at Danske Bank A/S in Copenhagen.

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