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BlackRock: Here’s the reason oil is rallying

Jessica Hartogs, Special to CNBC
Brent crude hits $40: What next?

Equity markets are going through a period of "short-covering," BlackRock senior director Ewen Cameron Watt told CNBC on Tuesday.

"There was always going to be a bit of a rebound in these sectors [oil and iron ore] because they have been so heavily sold down," said Watt.

"The supply side of oil is going to get tighter this year. The supply side of iron ore will get tighter in the next year and I think we're just seeing that kind of rebound."

Short-covering refers to traders trying to avoid losses after betting that a particular security would lose value.

However, Watt said, " I don't think we're about to start a super new cycle. Indeed China is cutting capacity, or trying to cut capacity this year which is again part of the story of stabilization in prices."

China's exports fell 25.4 percent on-year in February, while imports declined 13.8 percent, clocking far bigger slides than expected by analysts.

Oil Market Rebound
The price of gas is advertised at a fuel station in the Permian Basin oil field on January 20, 2016 in the oil town of Andrews, Texas.
Getty Images

Oil prices have jumped up this week, with global benchmark Brent crude breaking above $40-a-barrel level, a 50 percent price rise from January when prices hit a near 13-year low.

Watt told CNBC that the oil market rebound is "one of those surges you get in an oversold market."

"The price was going to stabilize because it was dropping to the levels where it was unprofitable to produce," he added.

"The inventories are still extremely full," he said. "The oil price itself, which has been behaving a bit like a penny stock, and the share prices are really responding because they have been very, very oversold and of course the lower the price is, proportionally the greater the percentage jump."

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