Oil Caps Biggest Two-Day Gain Since 2009 as Volatility Climbs

Oil's Race to the Bottom and the Global 'New Normal'
  • U.S. benchmark crude surged Thursday by most since March 2009
  • Futures post first weekly advance since June in New York

Oil capped the biggest two-day gain since 2009, sustaining a rebound above $40 a barrel amid signs of a strengthening economy in the U.S., the world’s biggest crude-consuming country.

Futures climbed 6.3 percent, extending a 10 percent gain on Thursday that was the biggest in more than six years. U.S. consumer purchases climbed in July as incomes grew, showing the biggest part of the nation’s economy was off to a good start in the second half of the year. This comes on the heels of data showing spending and the overall economy did better than previously estimated in the second quarter.

The rebound follows the lowest close since February 2009 on Monday after a slump in Chinese stocks sent ripples through global financial markets. Crude is still down 15 percent this year on concern a supply glut will persist. The Chicago Board Options Exchange Crude Oil Volatility Index climbed to the highest level since April 1 on Friday.

"Risk appetite has returned," Mike Wittner, head of oil-market research at Societe Generale in New York, said by phone. "We’re flushing China out of the system. The last $5-to-$10 of the decline was due to worries about the Chinese economy and now it’s stabilized enough that we’ve moved on."

Futures Rebound

West Texas Intermediate for October delivery surged $2.66 to $45.22 a barrel on the New York Mercantile Exchange. It was the highest settlement since Aug. 4. The 17 percent two-day gain was the most since January 2009. Prices climbed 12 percent this week, the biggest weekly advance since February 2011.

Brent for October settlement rose $2.49, or 5.2 percent, to end the session at $50.05 a barrel on the London-based ICE Futures Europe exchange. It increased 10 percent this week. The European benchmark crude closed at a $4.83 premium to WTI.

The gain in energy futures triggered increases in shares of oil and gas producers. Chevron Corp., the second-largest U.S. energy company, climbed as much as 4.6 percent.

"We’re seeing a continuation of yesterday," Bob Yawger, director of the futures division at Mizuho Securities USA in New York, said by phone. “Energy is the place to park your cash if you want to make a healthy return."

U.S. Economy

U.S. gross domestic product increased at a 3.7 percent annualized rate in the second quarter, exceeding all projections in a Bloomberg survey of economists. It was higher than the 2.3 percent expansion the Commerce Department reported last month.

Global equities lost as much as $8.4 trillion in value after China’s unexpected devaluation of the yuan on Aug. 11 spurred concern the world’s second-biggest economy was on the brink of a deeper slowdown, damping demand for raw materials and spurring a selloff in developing economies.

"The market was terrifically oversold in reaction to the situation in China," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. "There’s a lot of bottom fishing going on and a reassessment of the market fundamentals."

Oil must trade lower than $30 a barrel before producers will begin to curb production, according to Ed Morse, the head of global commodity research at Citigroup Inc. WTI will probably decrease below that level later this year and then recover, he said at a conference in New York on Thursday. U.S. explorers expanded drilling in oilfields for the sixth straight week, adding one rig, according to data from Baker Hughes Inc.

Mixed Sentiment

Analysts and traders were split on the direction of WTI futures, according to a separate Bloomberg survey through Thursday. Of the 48 respondents, 17 were bullish, 17 were bearish and 14 were neutral.

"The mood appears to have shifted from being wildly bearish," Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone.

September gasoline futures increased 6.5 cents, or 4.5 percent, to close at $1.5218 a gallon. Diesel for September delivery advanced 8.04 cents, or 5.4 percent, to settle at $1.5764.

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