– This is the script of CNBC's news report for China's CCTV on September 1, Tuesday.
Welcome to CNBC Business Daily, I'm Qian Chen.
Oil prices surged nearly 9 percent Monday, capping a three-day rally in which the commodity rose a total of more than 27 percent, after U.S. oil production data showed output falling and OPEC said it would talk with other producers about low prices.
Crude futures rebounded after retreating early Monday. U.S. oil, which rallied 12 percent last week, erased August's steep losses, closing up at a six-week high.
The contract's gains over the past three days mark its biggest winning streak for such a time period in 25 years.
[Matt Smith] "That really has been a crazy ride. We had this sort of one-direction rally that we were heading in one way straight for the last month and half, two months where have been plunging lower and lower, but these financial position of these money managers who get such short positions as market started to rebound within short covering and hence suddently we are back where we are now."
U.S. domestic crude oil production peaked at just above 9.6 million barrels per day (bpd) in April before falling by more than 300,000 bpd over the following two months, Energy Information Administration (EIA) data showed Monday. The report was a surprising contrast to rig data that has shown an increase in new drilling.
"It caught people off guard with the rig count being up six weeks in a row," said Tariq Zahir, managing member of Tyche Capital in Laurel Hollow, New York. "This is eye-opening."
Excess supply has weighed on oil, with forecasts from the Organization of the Petroleum Exporting Countries pointing to an oversupply of more than 2 million bpd.
The rally was boosted further as OPEC expressed concern Monday about oil's price drop and said the group is ready to talk to other producers about it. Since November, OPEC countries led by Saudi Arabia have kept production high to maintain market share, even as prices have plummeted.
[Andy Lipow, President of Lipow Oil ASSOC] "But as we've seen in the past, I remain very skeptical about OPEC will be able to come to an agreement with non-OPEC producers and actually cut productions as they all need to money100922 (joint by) 100936 I actually think crude oil prices are gonna come under pressure again here in the next 6 months as I expect WTI is gonna test 40 dollars and Brent will be at 44 dollars, as we going to the refinery mainlands perirod, and the market anticipate the return of iranian crude oil amid early part of 2016."
OPEC has increased pumping to three-year highs, and U.S. producers have continued drilling even as prices plummet, feeding into the global oversupply.
American shale oil producers are partially to blame for that supply-side problem, while OPEC output tends to be stable on a year-to-year basis, U.S. production has thrown a wrench into the works with its sudden, explosive growth.
OPEC leaders have criticized U.S. producers' "all-out exploitation of tight oil," and the Americans' expectation that OPEC countries will be willing to sacrifice market share in order to keep prices at reasonable levels.
But with crude oil selling for around $40 a barrel, it would run out of cash reserves long before that. According to the Big Crunch's model, Saudi Arabia could burn through its entire $655 billion currency reserves by the end of 2018 if oil prices don't rise.
Researchers at Barclays reached a similar conclusion, based on a scenario analysis of Brent prices at $50 a barrel. "Without fiscal adjustment and assuming no issuance of debt, Saudi Arabia's government deposits and FX reserves would be eroded by 2019," the investment bank wrote.
Even oil priced at $60 a barrel won't prevent Saudi Arabia from draining its reserves, unless it takes actions to cut costs.
Our model assumes the kingdom will keep up its promise to maintain production levels and marginal costs of drilling. Granted, it's theoretical and relies on a number of assumptions like maintenance of the real exchange rate and continued production levels. But it underscores the severity of the Saudi budget.
Another move in the oil market is from Warren Baffett.
Berkshire Hathaway disclosed a $US4.5 billion stake in Houston-based oil refiner Phillips 66, increasing its bet on the energy industry.
Berkshire held almost 58 million shares after purchases this week, or more than 10 per cent of the total outstanding, according to a regulatory filing to SEC, issued last Friday.
CNBC's Qian Chen, reporting from Singapore.
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