Bulls?Bet On?Oil?Rally As?
By Inyoung Hwang and Roxana Zega
(Bloomberg) — A shrinking number of U.S. oil rigs is
bolstering speculation that the three-week rebound in crude has
more to go.
Traders are paying the least in almost two years to hedge
against price swings in oil after they climbed to a five-year
high, data compiled by Bloomberg show. An exchange-traded fund
tracking the commodity attracted the most money in six years
last month.
U.S. drillers have idled rigs as excess supply triggered a
decline in crude of as much as 59 percent since June. Lower
supply, paired with a pickup in demand spurred by economic
recoveries from Europe to the U.S., will further boost oil
prices, according to Jens Naervig Pedersen, an economist at
Danske Bank A/S.
?The worst is over,? said Pedersen from Copenhagen.
?There?s been consolidation on the supply side, highlighted by
the steep drop in the U.S. oil rig count. The next phase will be
driven by a recovery in demand.?
The Organization of Petroleum Exporting Countries lowered
its forecast for an oil-supply increase from countries outside
the group, and the International Energy Agency said a faster
economic expansion will help demand growth accelerate this year.
The U.S. Oil Fund LP has lured money in 10 of the past 11
weeks, just as drillers in the nation idled 33 percent of their
rigs in the last 10 weeks, according to Baker Hughes Inc., the
third-biggest provider of oilfield services.
Fund Inflows
Investors poured $1.15 billion in the oil ETF last month,
the most since December 2008, data compiled by Bloomberg show.
That year, the commodity tumbled as much as 77 percent from a
record high before jumping 78 percent in 2009.
Bad weather in Iraq and lower production in Libya have also
propped up the outlook for oil. Weather delays may reduce
shipments from Iraqi ports by 1 million barrels a day this
month, according to consultant Petromatrix GmbH.
In Libya, crude production fell 150,000 barrels a day to
300,000 in January, the least since June, according to a
Bloomberg survey. Output slipped further after a fire at a
pipeline that carries the commodity to the port of Hariga.
While a gauge tracking expectations for oil volatility is
still double its one-year average, it reached the lowest level
since May 2013 relative to price swings over the past 20 trading
days, data compiled by Bloomberg show. That indicates traders
expect volatility to subside.
Fragile Recovery
The recovery in oil is still fragile, according to Carsten
Fritsch of Commerzbank AG. The recent increase in prices may
turn U.S. shale production profitable again, leading the
industry to keep up output, he said.
?Production may not fall as much as some believe,? said
Fritsch, a commodities analyst at Commerzbank in Frankfurt. ?A
lot of hot money flowed into the oil market, which might be
withdrawn again if expectations don?t materialize.?
The reduction in rigs isn?t enough to sufficiently curb
output and address the current excess, according to a Goldman
Sachs Group Inc. note on Monday. Production in the U.S. will
increase 7.8 percent to 9.3 million barrels a day this year, the
most since 1972, the Energy Information Administration forecast.
Paul Horsnell of Standard Chartered Plc says the supply
surplus may be temporary. Apache Corp. announced last week it
will cut its rig count by 70 percent and hold North American
output flat. Total SA is reducing its exploration budget by 30
percent.
?Rig counts have come off very heavily,? said Horsnell,
the London-based head of commodities research for Standard
Chartered. ?Even if it doesn?t fall anymore, U.S. shale output
is going to stop growing over the course of the second quarter,
possibly as early as April. In some cases, there?s even a
potential for a supply deficit in the second half of the year.?