Oil looking to settle above $50 for the first time in a month

SAN FRANCISCO (MarketWatch) — Crude-oil futures looked to settle above $ 50 a barrel for the first time in a month Tuesday, as prices jumped on speculation that a sharp decline in U.S. drilling activity will result in supply cuts.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in March CLH5, +7.20%  recently traded up $ 2.37, or 4.7%, at $ 51.94. The last time oil settled above $ 50 was Jan. 5.

Brent crude for March delivery on London’s ICE futures exchange LCOH5, +5.68%  rose $ 1.98, or 3.6%, to $ 56.73 a barrel.

Both global oil benchmarks have surged between 11% to 13% over the last three sessions, but market observers remain wary that the latest oil-price rebound can last.

“We’re seeing a continuation of concerns about capital-spending cuts and refinery strikes,” said Phil Flynn, senior market analyst at the Price Futures Group. “Add the sharp drop of the dollar in the mix, and that makes the bottom look more solid.”

Last week, crude settled at $ 44.45 a barrel, their lowest settlement since March 2009. The U.S. Dollar Index DXY, -1.20% which measures the dollar against a basket of six other major currencies, was down 1% Tuesday and 1.4% for the week.

“I’m surprised this rally has continued through to a fourth day,” said Matt Smith, a commodity analyst with Schneider Electric, in emailed comments.

“Granted, the rig count drop on Friday was a headline-grabber, while a correction in the dollar is providing a decent boost to crude prices. But given that we’re set for another chunky build to crude stocks tomorrow from the weekly inventory report, it seems this short-covering rally should run out of steam soon,” Smith said.

Later Tuesday, the American Petroleum Institute releases its initial oil-inventory data, followed by U.S. Energy Information Administration figures on Wednesday. Investors expect another weekly increase in U.S. oil stockpiles to record levels.

While cuts in capital spending and drilling will translate into slower production growth from outside the Organization of the Petroleum-Exporting Countries, supply may not be reduced in time to erase a projected global surplus of roughly 1.5 million barrels a day in the first half of 2015, Citigroup’s futures analyst Tim Evans said.

Prices are vulnerable to further declines without some tightening of the balance between demand and supply, warned Evans.

“Brent and [Nymex] prices could grind lower into the second quarter until evidence mounts that a deceleration of non-OPEC supply growth is taking shape,” RBC Capital Markets analysts said, in a Tuesday note. It slashed its 2015 forecast for Brent to $ 57 a barrel, from $ 71 a barrel, and its Nymex forecast to $ 53 a barrel, from $ 65 a barrel.

Global inventories are also building as more unused oil goes into storage in many countries. Société Générale estimates that the global buildup in oil stockpiles in 2008-2009 was 210 million barrels, rising to 265 million barrels in 2014. “We forecast another large build of 300 million barrels during the first half of 2015,” it said.

In other energy contracts, Nymex reformulated gasoline blendstock for March RBH5, +3.40% — the benchmark gasoline contract — rose 3 cents, or 1.7%, to $ 1.57 a gallon. Natural gas for March delivery NGH15, +3.43%  rose 8 cents, or 3.1%, to $ 2.76 per million British thermal units.

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