Oil Surges to 1-Month High as Output Drop Seen Balancing Market

  • First signs of market recovery seen: Shell CEO Van Beurden
  • U.S. crude output dropped 120,000 barrels in September: EIA

Oil climbed to the highest level in a month amid speculation that falling crude production will ease the global supply glut.

Futures rose 4.9 percent in New York. The first signs of recovery in the oil market are beginning to appear, Royal Dutch Shell Plc Chief Executive Officer Ben Van Beurden said at an industry conference in London Tuesday, though the company still plans for a long period of low prices. Crude also climbed as the dollar fell, bolstering demand for commodities as an investment.

Crude has held near $45 a barrel for more than four weeks after plunging to a six-year low in August amid speculation oversupplies will be prolonged. U.S. crude stockpiles remain about 100 million barrels above the five-year average, while OPEC continues to pump above its collective quota.

"A lot of people are saying the bottom is in," Mike Wittner, head of oil-market research in New York at Societe Generale AG, said by phone. "The general mood appears to have changed, but rebalancing the market will be a long process."

West Texas Intermediate for November delivery rose $2.27 to close at $48.53 a barrel on the New York Mercantile Exchange. It is the highest settlement since Aug. 31. The volume of all futures traded was 14 percent above the 100-day average at 4:36 p.m.

Futures extended gains after the American Petroleum Institute was said to report U.S. crude supplies fell 1.23 million barrels last week. WTI traded at $48.90 at 4:37 p.m.

‘Mixed Signals’

Brent for November settlement advanced $2.67, or 5.4 percent, to end the session at $51.92 a barrel on the London-based ICE Futures Europe exchange, the highest level since Aug. 31. The European benchmark crude closed at a $3.39 premium to WTI.

Shell’s Van Beurden sees “mixed signals” that prices will rise and consequently, he said, Europe’s largest oil company is still preparing for “lower for longer oil.”

“Demand is increasing and supply will be needed to meet that demand,” he said. “More and more supply will come from difficult areas with high costs. Higher prices will be needed to pay for this cost, so prices will increase. But we can’t depend on it.”

Production Cuts

With major producers cutting investment and world oil demand expected to grow, the market will eventually strengthen, according to Organization of Petroleum Exporting Countries’ Secretary-General Abdalla Salem El-Badri. The market is experiencing an oversupply of about 200 million barrels, he said at the conference. 

Crude supplies from countries outside of OPEC are set to fall by half a million barrels a day next year, Fatih Birol, executive director of the Paris-based International Energy Agency, said at the conference. The cuts in investment in oil projects seen this year are the biggest in the history of the sector, Birol said, adding that spending on upstream projects is down by at least 20 percent in 2015.

Global oil demand is projected to average 93.79 million barrels a day this year, the Energy Information Administration said Tuesday in its monthly Short-Term Energy Outlook. That’s up from 93.62 million the agency forecast in September. The EIA trimmed its projections for world crude production this year and in 2016.

Price Support

Non-OPEC production will be hit over the next year, giving prices a boost, Seth Kleinman, head of energy strategy at Citigroup Inc. said at an EIA/National Association of State Officials conference in Washington on Tuesday.

U.S. crude production fell 120,000 barrels a day in September, the EIA said. Crude output is down 514,000 barrels a day from a four-decade high reached in June, EIA data show.

"The drop in production is starting to register with folks," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. "We have the CEO of Shell and the OPEC secretary general talking about the market starting to recover. Low prices have already led to a 500,000-barrel cut in U.S. production."

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 of its major peers, decreased 0.5 percent. The Bloomberg Commodity Index advanced to the highest since Aug. 31.

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