Crude Oil Rises Above $40 in New York for First Time in 3 Months

Here's Why This Is Only the Fourth Time Oil Has Tanked
  • Commodities gain as Bloomberg Dollar Index slips second day
  • U.S. production drops to lowest level since November 2014: EIA

Oil surged above $40 a barrel in New York for the first time since December as central banks from the U.S. to Norway signaled they will continue to provide economic stimulus to support demand.

The Bloomberg Dollar Spot Index fell a second day after the Federal Reserve scaled back expectations for the pace of interest-rate gains. A weaker dollar bolsters investor demand for commodities priced in the currency. U.S. crude output slid to the lowest level since November 2014 and supplies expanded by 1.32 million barrels, the smallest gain in five weeks, according to an Energy Information Administration report on Wednesday. 

"It’s primarily a dollar story right now," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion. "The weak dollar is bullish for all commodities, especially oil."

West Texas Intermediate oil has surged 54 percent from a 12-year low touched last month on speculation a global surplus will ease. American shale output is falling and some of the world’s biggest producers including Saudi Arabia and Russia are pledging not to raise their production.

Round Number

WTI for April delivery rose $1.74, or 4.5 percent, to settle at $40.20 a barrel on the New York Mercantile Exchange. It’s the highest settlement since Dec. 3. Total volume traded was 19 percent above the 100-day average at 2:44 p.m.

Brent for May settlement climbed $1.21, or 3 percent, to $41.54 a barrel on the London-based ICE Futures Europe exchange. Futures ended the session at the highest level since Dec. 4. The global benchmark crude closed at a 12-cent discount to May WTI.

"Reaching $40 gets a lot of attention because its a nice round number," said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $128 billion of assets. "The $30 and $50 levels are more important in terms of investment decisions."

The Fed’s Wednesday decision to set a higher bar for when it may raise rates again also bolstered U.S. equities, which erased their losses for the year. The Standard & Poor’s 500 Oil & Gas Exploration and Production Index climbed as much as 2.8 percent.

The Bloomberg Commodity Index, a gauge of 22 raw materials, increased as much as 2.2 percent to the highest level since Dec. 7. Zinc, silver and WTI had the biggest gains on the index.

‘Easy Money’

"This is a strong rally and the main catalyst is the return of easy money," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. "The Fed announcement yesterday was the latest sign that central banks are going to continue with stimulus. This is putting downward pressure on the dollar, which favors commodities."

U.S. production dropped by 10,000 barrels a day to 9.07 million, according to an Energy Information Administration report Wednesday. Stockpiles at Cushing, Oklahoma, the delivery point for WTI, increased by 545,000 barrels to a record while nationwide supplies rose to the highest level in more than eight decades.

Some producers from the Organization of Petroleum Exporting Countries and outside the group are finalizing plans for a meeting in Doha on April 17 to discuss freezing output, according to Qatar’s Energy Minister.

Oil production freeze proposal news:

  • Saudi Arabia will join the meeting in Doha next month, according to Oil Minister Ali Al-Naimi.
  • The market may stabilize within six to nine months if a deal is reached in Doha, Russia’s Energy Minister Alexander Novak said in Moscow.
  • Saudi Arabia, Russia, Qatar and Venezuela agreed last month they would freeze output, if other producers followed suit, to tackle a global oversupply in the oil market.
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