Crude in New York advanced the most since June 2012 after a drop in the U.S. rig count signaled the slump in prices over the past seven months will curb output.
Oil capped the biggest weekly gain since July 2013 after Baker Hughes Inc. reported the oil rig count fell to a three-year low of 1,223. Chevron Corp. on Friday became the latest oil company to cut spending in response to free-falling prices.
Oil fell into a bear market last year as the Organization of Petroleum Exporting Countries resisted cutting output amid a surge in U.S. production driven by new supplies from Texas to North Dakota. OPEC oil production rose in January as Iraq pumped at a record pace.
Saudi Arabian Oil Co. Chief Executive Officer Khalid Al-Falih reiterated government policy on Jan. 27 that the kingdom won’t balance global crude markets “single-handedly.”
“We’ve reached a point where prices have fallen well below the cost of drilling in some places,” Matt Sallee, who helps manage $17.7 billion in oil-related assets at Tortoise Capital Advisors in Leawood, Kansas, said by phone. “This is going to squeeze out some existing production.”
Market Movement
West Texas Intermediate for March delivery climbed $3.71, or 8.3 percent, to $48.24 a barrel on the New York Mercantile Exchange. It was the biggest single-session gain since June 29, 2012. The volume of all futures traded was 27 percent higher than the 100-day average at 3:24 p.m. The contract rose 5.8 percent this week. Prices decreased 9.4 percent in January, a seventh monthly drop that’s the longest stretch of retreats since 2009.
Brent for March settlement rose $3.86, or 7.9 percent, to close at $52.99 a barrel on the London-based ICE Futures Europe exchange. It was the biggest gain since April 2009.
Volume was 41 percent above the 100-day average. It lost 7.6 percent in January, the seventh monthly drop, capping the longest slide since the contract began trading in 1988. The European benchmark closed at a $4.75 premium to WTI.
“It’s the end of the month and a lot of shorts are covering their positions,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago.
The oil rig count dropped by 94 this week, Baker Hughes said on its website. Drillers have idled 352 oil rigs in eight weeks. The slide in U.S. oil rigs over the past three months underscores how deeply the global collapse in oil prices has cut into the industry’s profits, prompting producers to curb spending.
‘Momentum Changer’
“The market is concerned that U.S. production will level off,” Flynn said. “Companies are cutting capital spending. The rig count is falling faster than many people had expected. It’s a momentum changer for many people.”
Chevron is targeting $35 billion in capital projects this year, down 13 percent from $40.3 billion in 2014, the San Ramon, California-based company said in a statement Friday. It was the largest reduction in its annual spending plan since 2003, when expenditures plunged 26 percent and crude prices were half their current levels.
“We’ve had a tremendous move and there are a lot of people who want to cover their short positions before going into the weekend,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by phone. “The overall picture for the market remains very negative, with domestic supplies set to climb even further.”
Surging Stockpiles
U.S. supply is still rising despite the decreasing rig count. Crude inventories gained by 8.87 million barrels to 406.7 million through Jan. 23, the most since at least August 1982, according to Energy Information Administration data. Output expanded to 9.21 million a day, the most in weekly estimates from EIA, the Energy Department’s statistical arm, dating back to January 1983.
OPEC output climbed 483,000 barrels a day to 30.905 million this month, led by gains in Saudi Arabia, Iraq and Angola, according to a Bloomberg survey of oil companies, producers and analysts. Iraqi production rose 200,000 barrels a day to a record 3.9 million in January.
“I don’t believe we’ll stay in this range for long because rising output is going to put further downward pressure on prices,” Mike Wittner, head of oil research at Societe Generale SA in New York, said by phone.
Northern Iraq
Kurdish security forces regained full control of the Kirkuk oil hub, according to an official from the region’s force known as Peshmerga. Two Pershmerga officers were killed regaining control of Kirkuk in northern Iraq, Brigadier Saho Abdul Kareem said by phone.
Exports from the Kirkuk field resumed for the first time since March following a deal in December between the Iraqi central government and the semi-autonomous Kurds.
“The mayhem in northern Iraq might be adding to the geopolitical premium in the market along with the ongoing Russia-Ukraine conflict,” Yawger said. “The situation in Israel isn’t looking good either, but I think this is secondary. If geopolitics were the prime mover Brent would be up more than WTI.”
Gasoline futures for February delivery climbed 6.16 cents, or 4.6 percent, to settle at $1.4153 a gallon in New York. It was the highest closing price since Jan. 2. Ultra-low sulfur diesel advanced 6.79 cents, or 4.2 percent, to close at $1.6863. The February gasoline and diesel contracts expired on Friday.
Regular gasoline at U.S. pumps dropped to $2.033 a gallon on Jan. 25, the lowest level since April 2009. The average retail price rose 0.7 cents to $2.051 a gallon Thursday, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group.
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