Oil prices officially charged into a bull market Thursday as the prospect of an output freeze by major producers, data showing the first weekly fall in U.S. crude supplies in a month and a decline in the dollar lift prices up by more than 20% from their recent low.
September West Texas Intermediate crude CLU6, +2.99% climbed by $1.30, or 2.8%, to $48.09 a barrel on the New York Mercantile Exchange. That is nearly 22% above the recent settlement low of $39.51 on August 2. Prices Thursday were set to log a sixth-straight session gain.
“This is definitely an impressive move higher,” said Tyler Richey, co-editor of The 7:00’s Report. It appears that “the freeze speculation” is working for the Organization of the Petroleum Exporting Countries again, he said.
Earlier this month, the 14-member group of major oil producers said it would only an informal meeting on the sidelines of an energy forum in Algeria on Sept. 26 to Sept. 28 to discuss ways to stabilize the oil market.
Read: Oil market déjà vu sets in as OPEC plans ‘informal’ meeting
Saudi Arabia, OPEC’s top producer, and non-OPEC Russia, the world’s largest producer, have expressed willingnessness to participate in those talks, which some say could lead to a pact to freeze production at current levels.
Iran has chimed in, reiterating plans to raise its production back up to pre-sanction levels, raising doubts over a deal to freeze output. An attempt last spring to reach an agreement in Doha, Qatar to freeze output failed after Iran refused to join in, prompting the Saudis to give up on the plan.
But that has failed to put a lasting damper on oil prices, which trade roughly 8% higher week to date.
Adding to fire to the rally, the U.S. Energy Information Administration on Wednesday revealed that domestic crude inventories fell for the first time in four weeks and the dollar was set to end the week lower against its currency rivals, with the ICE U.S. Dollar Index DXY, -0.46% down about 1.4% week to date.
Darin Newsom, DTN senior analyst, pointed out Thursday that this week’s oil rally has established a new four-week high—a “secondary bullish technical signal meaning that the market could continue to rally despite minor, short-term, indicators being overbought.”
Still, traders need to keep in mind that the current front-month September futures contracts expire at the Nymex settlement on Monday. October WTI crude CLV6, +2.80% will become the new front and it’s trading higher than the September contract, at about $48.77 a barrel Thursday.
The September-to-October price spread is at “contango of roughly 65 cents” a barrel, said Newsom. This could put the October contract at the July high of $49.35 when it takes over as the spot contract, he said.
Richard Hastings, macro strategist at Seaport Global Securities, said the rally in the October WTI contract is “pretty substantial, quickly moving from about $40 per barrel to almost $48.”
“We see some resistance at about $49.60…showing how tough it is to get back to and beyond $50,” he said. But “a couple of hurricanes in the Gulf of Mexico would help.” Atlantic hurricanes can disrupt oil production in the region.
Luckily, at least for the oil-price bulls, the U.S. National Oceanic and Atmospheric Administration recently raised its expectations for the Atlantic hurricane season which ends on Nov. 1.
Energy investors appear to be getting ahead of themselves, judging by the premium energy stocks are demanding over the price of oil.
While U.S. crude is down by more than 10 percent from its highest close this year on June 8, the S&P 500 Energy Index is off less than 1 percent since, and the S&P/TSX Energy Index of Canadian producers has gained 3.8 percent. The disconnect implies, unless oil prices are set to rise sharply, equities are overpriced.
“Oil prices are telling you it’s not good and yet equity investors are finding all kinds of different reasons to stay in the stocks,” Martin Pelletier, managing director and fund manager at TriVest Wealth Counsel in Calgary, said in a phone interview. His firm closed its energy fund a month ago after the spring oil rally and has taken its clients’ individual energy holdings almost to zero, he said. “The upside is less than the downside risk.”
Crude has fluctuated on mixed signals since declining more than 20 percent into a bear market and closing below $40 a barrel in the first week of August. A rise in drilling rigs in the U.S., heading into a period of seasonal demand weakness, is fomenting negative sentiment that a supply glut will persist, while indications Saudi Arabia is prepared to discuss stabilizing markets are supporting prices.
The two-year rout in crude has eroded cash flow for producers globally, forcing them to shelve drilling, cut workers and squeeze costs to survive. The most recent quarterly results for North American energy companies shows 84 percent had lower revenues than a year ago.