Oil gains as drilling slows in US

Oil prices are showing signs of recovering, say some analysts. Photo / AP

Drop in non-Opec output thought likely to rebalance prices in oversupplied market.

Oil advanced, capping the first weekly gain since November, after the International Energy Agency lowered forecasts for supplies from outside Opec and an industry report showed US companies had reduced drilling activity.

Crude rose 5.3 per cent in New York. Non-Opec oil producers would boost output this year at a slower rate than previously forecast, aiding a recovery in crude prices, the IEA said in its monthly market report. Rigs targeting oil in the US fell for the eighth time in nine weeks, by 55 to 1366 last week, Baker Hughes said on its website. They are at the lowest level since October 2013.

"It definitely looks like the market's trying to form a near-term low," Kyle Cooper, director of commodities research at IAF Advisors in Houston, said. "It's about time we did take a breather since we've already dropped US$60."

WTI for February delivery increased US$2.44 to settle at US$48.69 a barrel on the New York Mercantile Exchange. The contract dropped to US$44.20 on January 13, the lowest level since April 2009. The contract rose 0.7 per cent last week.

Oil fell almost 50 per cent last year, the most since the 2008 financial crisis, as supplies swelled amid the fastest pace of US production in more than three decades and Opec resisted calls to cut output. Goldman Sachs Group and Societe Generale SA were among banks to reduce their price forecasts.

"I still think that there's at least a 50-50 chance US$44.20 will be breached," Cooper said.

WTI tumbled 69 per cent from US$31.82 a barrel in November 1985 to US$9.75 in April 1986 when Saudi Arabia, tiring of cutting output to support prices, flooded the market. Prices did not recover until 1990.

"The best historical analogy for what's happening is 1986," said Bill O'Grady, chief market strategist at Confluence Investment Management in St Louis. "It will be extraordinarily painful for non-Opec producers to lead the way to a rebalanced market."

The IEA, a Paris-based adviser to industrialised nations, lowered its non-Opec supply growth estimate by 350,000 barrels a day, the first cut since the 2015 forecast was introduced in July. Half the reduction was from Colombian output while effects on US production were so far "marginal," it said.

The slowdown in output growth would lead to a "rebalancing" of currently oversupplied global markets in the second half, reviving prices.

Lower prices would not bolster demand because of weakness in the global economy, said the agency, which kept its global oil consumption forecast for 2015 unchanged.

US crude supplies rose by 5.39 million barrels to 387.8 million the previous week, the highest since June, according to an Energy Information Administration report on January 14. Production climbed 60,000 barrels a day to 9.19 million in the seven days ended January 9, the highest in weekly estimates that started in January 1983, according to EIA data.

"There was a little supportive news today with the IEA reducing the non-Opec production forecast," said Tim Evans, an energy analyst at Citi Futures Perspective in New York. "This still looks like a very challenging market. We're going to see 1.5 million barrels a day of excess production through the first half of the year and possibly more."

- Bloomberg