Strong crude demand and signs of ebbing U.S. production led oil back into a bull market
Demand was a bright spot, following worries that damage from major hurricanes in the southern U.S. would crimp consumption. Above, a refinery in Ohio. PHOTO: LUKE SHARRETT/BLOOMBERG NEWS
Oil investors got a reprieve from falling oil prices in the third quarter, thanks to unexpectedly strong demand for crude and signs of ebbing U.S. production.
West Texas Intermediate, the U.S. crude benchmark, ended the quarter 12.2% higher, snapping a two-quarter losing streak and marking the biggest quarterly gain since the second quarter of 2016. U.S. crude futures re-entered a bull market in September and are up nearly 21.5% from the lows in June. A gain of 20% or more signals the start of a bull market.
Demand was a bright spot, even amid worries that damage from major hurricanes in the southern U.S. would crimp consumption.
The International Energy Agency raised its forecast for demand growth for next year. At the end of March, global fuel demand was just 1.3% higher than the previous year, according to J.P. Morgan Asset Management. By the end of July, demand grew 3.2% from the previous year—the biggest year-over-year increase since 2010.
“Everyone was concerned that global demand for oil was weakening. As we’ve moved through the year, it’s actually strengthening again,” said Rob Thummel, managing director at Tortoise Capital Advisors. “Ultimately consumers responded to lower oil prices, once again.”
There were also signs that U.S. output hasn’t increased as quickly as some had expected, as producers contended with rising costs, slowing oil field activity.
THIRD-QUARTER REPORT
That boosted sentiment for oil investors, who had earlier feared that output from shale producers would cancel out the impact of cuts by members of the Organization of the Petroleum Exporting Countries and other producers.
The number of rigs drilling oil wells in the U.S. fell by 6 during the quarter, compared with an increase of 94 rigs during the second quarter.
“The entire first quarter and into the second, shale was the dominant factor,” said Ebele Kemery, head of energy investing at J.P. Morgan Asset Management. Now, “we’ve seen the trajectory of U.S. shale production growth slow.”
The U.S. Energy Information Administration’s monthly figures show that U.S. output has increased but that it hasn’t been as high recently as preliminary weekly data had indicated. The EIA has moderated its projection of next year’s production to 9.8 million barrels a day from a previous 10 million.
Some remain skeptical that the rebound in oil prices will continue. The rig count could begin to rise again if prices stay above $50, analysts said.
“There is probably limited upside,” said Andy Lebow, senior partner at Commodity Research Group.
One reason is that producers are looking to take advantage of the recent rally to lock in higher prices, analysts said. Beyond that, OPEC’s compliance with its deal has been highin recent months, and the group has discussed extending its production cuts further into 2018. But the cartel hasn’t yet committed to such a move.
“I don’t think we’re on some fast track” to higher prices, said John Saucer, vice president of research and analysis at Mobius Risk Group.
Write to Alison Sider at alison.sider@wsj.com
Information retrieved from https://www.wsj.com/articles/oil-prices-bounce-back-in-third-quarter-1506855610 on Oct. 3, 2017